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NO.  94-821 73 


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Author: 

Humphreys,  Alexander 
Crombie 

Title: 

Supplement  no.  1  to 
Lecture  notes  on  some 

Place: 

[Hoboken,  N.J.] 

Date: 

1905 


MASTER   NEGATIVE   # 


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SUPPLEMENT    No.    I 

TO 

Lecture    Notes 

ON   SOME  OF   THE 

BU  SINBSS 

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mLj  A   I   V  11  JELr  cl 

ENGINEERING 
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DEPARTMENT 
OF  BUSINESS 
ENGINEERING 
Stevens  Institute 
of  Technology 
1905 


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7 


SUPPLEMENT  No.  1 


TO 


LECTURE  NOTES 


ON  SOME  OF  THE 


Business    Features 


OF 


Engineering 
Practice 


BY 

ALEX.  C.  HUMPHREYS,  M.E.,  ScD.,  LLD. 

President  of  the  Stevens  Institute  of  Technology 


DEPARTMENT  OF  BUSINESS  ENGINEERING 

Stevens  Institute  of  Technology 
1905 


th'  _^ 


COPYRIGHT,  1905, 

BY   THE 

STEVENS  INSTITUTE  OF  TECHNOLOGY 


IP 


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t 


Jy   { 


INTRODUCTORY. 

These  notes  are  intended  to  supplement  the  mat- 
ter contained  in  "Lecture  Notes  on  Some  of  the  Busi- 
ness Features  of  Engineering  Practice,"  lately  issued. 

Work  in  the  class-room  has  subsequently  devel- 
oped the  fact  that  these  additions  are  advisable,  and 
as  the  course  already  covers  far  more  ground  than  is 
represented  in  the  original  notes  and  these  additions, 
other  supplements  will  probably  be  issued  from  time 
to  time. 

Again  I  have  to  thank  Mr.  White  for  his  valu- 
able assistance,  so  willingly  rendered. 

ALEX.  C.  HUMPHREYS. 

The  Stevens  Institute  of  Technology, 
hoboken,  n.  j. 


410040 


\ 


SUPPLEMENTAL    NOTES 


ON 


COMMERCIAL   LAW 


Prepared  by  Howard  E.  White,  Esq. 

AGENCY. 

In  notes  previously  prepared,  the  general  subject  of  con- 
tracts has  been  considered,  and  an  attempt  made  to  give  in  a  not 
too  technical  form  the  general  principles  v^hich  underlie  all  agree- 
ments. If  these  have  been  mastered  it  is  now  possible  to  proceed 
to  a  consideration  of  some  special  forms  of  contracts  which  the 
business  or  professional  man  is  most  frequently  called  upon  to 
make.  The  general  principles  are  common  to  all,  but,  in  additioh, 
each  variety  of  contract  gives  rise  to  special  rules,  which  must  be 
considered. 

One  of  the  most  common  acts  of  everyday  life  is  to  delegate 
authority  to  another,  for  some  more  or  less  general  purpose.  A 
moment's  consideration  will  disclose  to  anyone  how  frequent  this 
act  is.  It  is  often  done  so  casually  as  to  escape  notice,  but  from 
the  act  of  sending  a  street  urchin  to  buy  a  morning  paper  to  the 
broad  power  of  attorney  which  the  multi-millionaire  gives  to  his 
confidential  secretary  the  principle  is  the  same,  and  the  two  opera- 
tions stand  side  by  side  before  the  law  as  the  establishment  of  an 
agency.  Let  the  terms  which  we  are  about  to  use  be  clearly 
defined. 

A  Principal  is  one  who  delegates  to  another  the  authority  to 
represent  and  act  for  him. 

An  Agent  is  one  to  whom  such  authority  is  delegated. 

Agency  is  the  relationship  existing  between  Principal  and 
Agent. 

An  agency  may  be  either  general  or  special,  depending  upon 


6  Business  Engineering. 

the  scope  of  the  powers  granted.  It  is  general  when  the  agent  is 
empowered  to  represent  his  principal  in  all  his  affairs,  or  all  his 
affairs  of  a  particular  kind.  It  is  special  when  the  authority  is 
of  any  less  extent. 

This  distinction  is  of  the  utmost  importance  to  consider,  for 
it  must  be  remembered  that  the  relationship  of  agency  concerns 
not  only  the  principal  and  agent,  but  also  those  with  whom  the 
agent  deals  in  behalf  of  the  principal.  If  the  agent's  authority 
to  bind  the  principal  is  to  be  in  any  way  limited,  great  care  must 
be  taken  that  the  limitation  be  apparent  to  outsiders. 

The  key  to  the  relationship  of  agency  which  unlocks  many 
doors,  and  makes  simple  the  problems  presented,  lies  in  the  con- 
sideration that  the  act  of  the  agent  within  the  scope  of  his  authority 
is  the  act  of  the  principal,  as  truly  as  though  it  had  been  personally 
performed,  and  once  performed  the  agent  disappears  from  the 
operation,  and  leaves  the  principal  alone  involved.  Much  of  the 
difficulty  of  the  subject  arises  from  a  misapprehension  of  this 
fact.  The  agent  is  the  alter  ego  or  other  self  of  the  principal,  and 
the  law  makes  no  distinction  as  to  the  liability  of  the  principal 
between  acts  personally  performed  and  those  done  by  a  duly 
authorized  agent. 

It  will  at  once  be  seen  what  an  important  subject  agency  is, 
and  how  great  should  be  the  care  used  in  selecting  an  agent. 

Why  Is  Agency  a  Contract? 

At  first  sight  it  seems  somewhat  strange  to  denominate  such 
a  relationship  a  contract,  but  a  moment's  thought  will  show  that 
the  agreement  of  the  agent  to  represent  the  principal,  and  of  the 
principal  to  employ  the  agent,  forms  an  obvious  contract,  for 
which  the  consideration  is  the  remuneration  received  by  the  agent 
and  the  benefit  received  by  the  principal  from  being  able  to  dele- 
gate certain  duties  to  another. 

Establishment  of  Agency. 

An  agency,  like  almost  every  other  contract,  may  be  created 
orally  or  by  written  instrument.     The  authority  may  be  conferred 


( 


Lecture  Notes.  7 

either  before  the  act  contemplated  or,  in  some  cases,  by  a  subse- 
quent approval  and  ratification  of  a  previously  unauthorized  act. 

Let  us  suppose  that  A,  without  authority  from  B,  should  go 
to  C,  and  purporting  to  represent  B,  purchase  a  stock  of  mer- 
chandise ;  A  or  C  then  notifies  B,  and  the  latter  acquiesces  in  A's 
acts.  B  thus  ratifies  A's  acts  and  becomes  bound  thereby.  Dis- 
affirmance of  an  unauthorized  act  must  be  prompt  and  complete 
if  liability  is  to  be  avoided.  It  need  hardly  be  said  that  ratifica- 
tion can  only  be  predicated  upon  full  knowledge  of  all  the  facts 
involved.  Sometimes  an  agency  is  implied  by  operation  of  law,  as 
where  one  person  knowingly  permits,  without  objection,  another 
to  hold  himself  out  as  a  representative,  and  to  enter  into  agree- 
ments in  his  behalf. 

Relationship  Involved  in  Agency. 

A  consideration  of  the  relationships  arising  out  of  agency 
falls  naturally  under  three  heads: 

a.  Relationship  between  principal  and  agent. 

b.  Relationship  between  principal  and  third  persons  with 
whom  the  agent  deals. 

c.  Relationship  of  the  agent  to  third  persons. 

These  three  will  be  considered  in  turn : 

a.  The  extent  of  the  agency  depends  entirely  upon  the  agree- 
ment between  principal  and  agent.  It  may  be  as  broad  or  as 
narrow  as  the  principal  pleases,  but  it  should  always  be  clearly 
defined,  otherwise  endless  trouble  ensues  from  the  commission 
of  unauthorized  acts.  In  all  but  the  simplest  cases  the  scope  of 
the  agency  should  be  defined  either  by  formal  power  of  attorney 
or  by  a  memorandum  in  writing. 

An  agent  who  is  authorized  to  accomplish  a  given  result  is 
usually  considered,  by  implication,  to  be  possessed  of  authority  to 
do  any  act  necessary  to  effect  such  end  in  a  reasonable  and  pru- 
dent way. 

Practically  speaking,  the  more  indefinite  the  language  defin- 
ing the  power  of  the  agent,  the  broader  and  more  general  will 
be  his  authority,  and  conversely,  the  more  explicit  the  language, 


8 


Business  Engineering. 


the  more  closely  will  the  agent  be  held  to  its  terms.  It  is  a  com- 
mon error  for  one  who  wishes  to  give  a  general  power  of  attor- 
ney to  make  great  efforts  to  enumerate  every  conceivable  act 
which  may  be  performed.  Human  foresight  being  fallible,  the 
probability  is  that  the  one  essential  act  will  be  omitted,  with  the 
result  that  the  very  explicitness  defeats  its  own  ends  and  the 
agent  is  confined  to  solely  what  has  been  enumerated.  A  half  a 
dozen  lines  giving  a  general  authority  to  act  for  the  principal  in 
every  case,  and  enumerating  almost  no  specific  instances,  would, 
in  general,  result  in  granting  a  power  so  broad  that  little 
could  be  deemed  beyond  its  purview. 

Principal. — The  principal  owes  to  his  agent  the  duty  of  pay- 
ing the  agreed  remuneration  for  his  services ;  of  performing  the 
agreements  which  his  agent  shall  lawfully  make  in  his  behalf, 
and  of  saving  the  agent  harmless  from  any  personal  liability  for 
such  acts. 

Agent.— Th^  agent  owes  to  the  principal  the  duty  of  faith- 
ful performance  of  the  acts  committed  to  him,  with  reasonable 
diligence  and  prudence.  He  cannot  make  personal  profit  from  his 
acts  as  agent ;  all  such  profits  belong  to  the  principal.  He  occupies, 
a  position  of  the  utmost  responsibility,  and  is  held  to  the  highest 
measure  of  good  faith. 

For  a  breach  of  these  duties  he  incurs  not  only  the  danger  of 
having  his  principal  refuse  to  accept  his  acts,  and  so  becoming 
personally  responsible  to  those  with  whom  he  has  dealt,  but  he 
may  also  be  held  liable  to  the  principal  for  losses  resulting  from 
his  acts. 

The  only  safe  rule  for  an  agent  to  pursue  is  to  make  absolutely 
certain  that  he  clearly  understands  the  limits  of  his  authority,  and 
then  to  transact  the  business  entrusted  to  him  with  an  eye  abso- 
lutely  single  to  his  principal's  interests.  The  thought  of  his  self 
interest  must  never  swerve  him  a  hair's  breadth  from  his  duty  to 
the  principal. 

It  may  sometimes  occur  that  an  agent  will  derive  personal 
prestige  from  successful  accomplishment  of  his  principal's  busi- 


I 


Lecture  Notes,  9 

ness,  but  he  should  never,  without  his  principal's  consent,  derive 
pecuniary  profit  other  than  his  agreed  recompense. 

h.  Principal's  relation  to  third  persons. 

These  may  be  very  briefly  stated. 

So  long  as  the  agent  does  not  exceed  his  authority,  the  prin- 
cipal is  liable  to  third  persons  for  every  act  which  the  agent  may 
perform  to  the  same  extent  as  though  such  acts  had  been  done  in 
person. 

In  addition,  a  principal  is  sometimes  held  Hable  to  third 
persons  for  unauthorized  acts  of  his  agent,  if  guilty  of  careless- 
ness or  negligence  in  permitting  his  agent  to  perfom  such  acts. 

An  agent's  unauthorized  acts  may  take  several  forms : 

1.  He  may  do  an  act  totally  unconnected  with  his  agency,  and 
which  could  not  be  considered  by  any  prudent  man  as  incident 
thereto.  For  such  acts  the  principal  is  never  liable  if  he  promptly 
disavows  responsibility. 

2.  The  agent  may  commit  an  unauthorized  act  which  is  in 
some  measure  related  to  his  real  duty  and  might  reasonably  be 
considered  to  .be  a  part  thereof  by  one  not  fully  cognizant  of  the 
limitations  of  his  authority. 

The  question  then  is,  whether  the  principal  is  bound  by  such 
an  act.  The  answer  is  not  altogether  simple,  but  must  be  deter- 
mined by  the  following  test : 

The  principal  is  bound  by  all  acts  of  the  agent  which  are 
within  the  scope  of  the  authority  which  the  agent  reasonably 
appears  to  have.  In  other  words,  the  principal,  to  protect  himself, 
must  see  that  he  never  knowingly  permits  his  agent  to  act  in  a 
way  which  would  justify  the  public  in  supposing  that  the  agent 
had  powers  which  in  fact  he  did  not  possess. 

This  seems  a  somewhat  harsh  doctrine,  but  it  is  based  upon 
the  theory  that  if  one  takes  the  risk  of  delegating  power  to  another 
he  must  be  willing  to  accept  all  the  reasonable  consequences  of 
so  doing. 

3.  An  agent  sometimes  purports  to  act  for  a  former  principal 
after  his  authority  has  been  revoked.  What  is  the  liability  of  the 
former  principal? 

A  general  agency  once  established  is  presumed  to  continue 


10 


Business  Engineering. 


II 


until  notice  is  given  of  its  termination.  That  is,  when  a  third 
person  has  been  in  the  habit  of  deaHng  with  an  agent,  he  is  justified 
in  continuing  to  do  so  until  notified  that  the  agency  is  at  an  end. 

A  principal  is  bound,  therefore,  if  he  would  terminate  an 
agent's  power,  to  take  every  precaution  possible  to  a  reasonably 
prudent  and  cautious  man,  to  notify  all  those  with  whom  the  agent 
has  been  dealing  that  the  relationship  is  at  an  end.  Otherwise,  a 
principal  may  sometimes  find  that  a  former  agent  has  involved 
him  in  liability  and  expense. 

c.  Relation  of  Agent  to  Third  Persons. 

When  an  agent  obeys  his  instructions  and  does  not  exceed 
his  authority,  and  lets  it  be  known  that  he  is  acting  as  an  agent, 
he  incurs  no  personal  liability  whatever. 

He  may  be  held  personally  liable,  however,  for  unauthorized 
acts  which  he  commits,  upon  the  theory  that,  having  agreed  to  do 
something  beyond  the  scope  of  his  authority,  it  became  in  effect 
merely  his  personal  venture. 

It  sometimes  happens  that  an  agent,  even  though  he  be  acting 
within  the  scope  of  his  authority,  neglects  to  tell  the  person  with 
whom  he  is  dealing  that  he  is  an  agent.  That  is,  he,  to  all  appear- 
ances, is  acting  on  his  own  behalf.  If  he  does  so,  such  third  per- 
son has  the  option  of  holding  liable  either  the  agent  or  his  princi- 
pal, upon  discovering  the  latter's  identity.  It  will  thus  be  seen 
that  it  is  extremely  unwise  for  an  agent  to  conceal  his  real 
standing.  It  may  result  in  heavy  personal  liability.  If  the  exigen- 
cies of  a  principal's  business  require  that  his  name  should  be 
concealed  and  the  agent  be  the  apparent  party  in  interest,  the 
agent  should  require  ample  security  for  assuming  the  risk 
involved. 


Principal's  Liability  for  Agent's  Wrong  Doing. 


I 


Heretofore  we  have  treated  of  the  agreements  or  contracts 
which  an  agent  may  make  or  purport  to  make  for  his  principal. 
There  is,  however,  another  point  to  be  considered. 

It  sometimes  happens  that  an  agent  inflicts  actual  physical 
damage  either  to  the  person  or  property  of  a  third  person.    Thus, 


Lecture  Notes. 


II 


t 


a  truckman  may  so  carelessly  and  negligently  drive  his  employ- 
er's wagon  as  to  cause  injury  to  life  or  property.  What  is  the 
employer's  or  principal's  liability? 

It  is  closely  akin  to  that  arising  out  of  the  agent's  agree- 
ments or  contracts. 

If,  when  the  accident  occurred,  the  agent  was  engaged  in 
doing  that  for  which  he  was  authorized,  then  his  principal  is 
liable  for  any  carelessness  or  negligence  of  which  he  was  guilty. 

A  good  example  of  this  doctrine  has  recently  come  before  the 
courts : 

A  chauffeur,  using  an  automobile  in  accordance  with  his  em- 
ployer's orders,  negligently  runs  over  and  injures  a  man.  The 
employer  is  liable  for  damages.  But  let  us  suppose  that  the  same 
chauffeur,  knowing  that  his  employer  is  away,  uses  the  automobile 
to  entertain  a  party  of  his  own  friends,  and  while  so  engaged 
negligently  causes  an  accident.  His  employer  is  not  liable.  The 
reason  for  this  is,  obviously,  that  in  the  first  case  the  agent  or 
servant  was  engaged  in  the  business  which  his  master  directed 
him  to  perform,  while  in  the  other  he  was  acting  in  violation  of 
his  duty. 

So  it  will  be  seen  that  when  the  agent  is  acting  within  the 
scope  of  the  authority  which  he  apparently  possesses  his  principal 
is  responsible  for  all  the  results  which  follow  therefrom,  even 
though  such  results  shall  occur  by  reason  of  the  carelessness  of 
the  agent.  Here  again  will  be  seen  the  doctrine  that  if  a  principal 
entrusts  to  another  a  duty  which  he  would  otherwise  personally 
perform,  he  must  stand  responsible  for  the  acts  of  that  individual. 

Duration  of  Agency. 

Like  other  contracts,  an  agency  may  be  for  a  definite 
time  or  purpose,  or  it  may  be  unlimited  in  duration.  If 
the  term  or  purpose  of  the  agency  be  defined,  it  is  obvious 
that  at  the  expiration  of  the  date  or  the  performance  of  the 
designated  duty  the  relationship  terminates.  If  the  agency  is 
for  an  indefinite  time,  it  may  be  terminated  at  any  period  that 
the  principal  or  the  agent  choose,  but  it  is,  of  course,  obvious 


12 


Business  Engineering. 


i 


that  the  right  to  terminate  when  exercised  by  either  the  principal 
or  agent  against  the  wish  of  the  other  must  be  so  exercised  as 
not  to  inflict  unreasonable  harm.  Thus,  a  reasonable  notice  of  the 
intent  to  terminate  an  agency  should  be  given. 

There  is  one  exception  to  the  right  to  terminate  an  agency 
without  mutual  consent.  It  sometimes  occurs  that  an  agent  is 
given  by  his  principal  an  interest  in  the  business  which  he  is  dele- 
gated to  perform.  Thus,  an  agent  may  be  authorized  to  erect  a 
certain  building  and  be  given  as  recompense  a  commission  upon 
the  cost.  It  would  be  obviously  unfair  to  arbitrarily  terminate 
this  agency  and  deprive  the  agent  of  his  interest  therein.  In  such 
cases  as  these,  where  the  agency  is  said  to  be  coupled  with  an 
interest,  it  cannot  be  terminated  without  the  consent  of  the  agent. 
Of  course,  even  in  this  instance  incompetency  or  other  mis- 
behavior on  the  part  of  the  agent  would  justify  its  termination. 

An  agency  is  also  terminated  at  times  by  law.  Thus,  an 
iagency  to  rent  a  particular  building  is  terminated  if  the  building 
be  destroyed.  So,  the  death  or  insanity  of  either  principal  or 
agent  terminates  the  relationship. 

Capacity  of  Agent  and  Principal. 

Anyone  who  is  legally  capable  of  entering  into  an  agreement 
is  capable  of  employing  an  agent  to  do  the  same  act.  In  default 
of  such  capacity  in  the  principal,  the  agent  has  no  authority,  for  it 
is  clear  that  no  person  can  transmit  to  another  power  which  he 
does  not  himself  possess. 

The  inquiry  as  to  the  capacity  of  an  agent  is  easily  solved. 
Anyone  who  is  physically  or  mentally  capable  of  doing  the  act 
which  he  is  authorized  to  do  is  capable  of  assuming  the  relation 
of  an  agent,  irrespective  of  whether  he  would  be  able  to  personally 
perform  the  act  in  his  own  behalf.  Again  will  be  noted  the  fact 
that  the  agent  simply  stands  in  the  position  of  his  principal. 

Practical  Suggestions. 

The  foregoing  gives  a  most  fragmentary  and  condensed  state- 
ment of  the  very  important  law  of  agency.     It  will  have  served 


Lecture  Notes. 


13 


its  purpose,  however,  if  it  shall  have  disclosed  the  danger  which 
an  individual  encounters  when  authority  is  delegated.  In  order 
to  avoid  repetition,  much  that  is  said  under  the  general  head  of 
contracts  has  been  omitted  from  the  subject  of  agency.  The  two 
sets  of  notes  must  be  read  jointly. 

It  is  of  the  utmost  practical  importance,  however,  to  all 
business  and  professional  men  that  they  should  have  a  true  under- 
standing of  the  power  which  they  place  in  the  hands  of  subordi- 
nates. It  is  a  most  customary  thing  to  see  employes  placed  by 
their  superiors  in  positions  of  responsibility  and  in  representative 
capacities  where  their  power  for  harm  is  unduly  great.  Often, 
without  the  presence  of  any  dishonesty,  incompetency  makes  pos- 
sible loss  and  serious  embarrassment.  Every  employer,  therefore, 
should  scrutinize  with  extreme  caution  the  work  which  he  requires 
of  his  subordinates,  particularly  of  those  who  are  frequently  away 
from  his  direct  supervision.  No  subordinate  should  ever  be  per- 
mitted to  make  contracts  or  agreements  for  his  employer  until 
time  and  experience  shall  have  proved  his  ability  and  worth.  It 
frequently  happens  that  an  employee  is  given  the  authority  to  do 
an  act  which  is  harmless  in  itself,  but  which  may  justify  the  per- 
son with  whom  he  deals  in  assuming  that  he  possesses  much 
wider  power.  Great  care  should  be  taken  to  avoid  this  serious 
situation. 

So  far  as  the  agent  or  employee  is  concerned,  the  problem  is 
a  much  simpler  one.  So  long  as  he  makes  certain  that  he  possesses 
a  thorough  understanding  of  the  duties  which  are  required  of 
him,  and  is  always  in  a  position  to  disclose  the  fact  that  he  is  act- 
ing in  a  representative  capacity,  he  incurs  no  serious  legal  danger. 


I 


PARTNERSHIP. 

One  of  the  most  important  forms  of  contract  which  a  busi- 
ness or  professional  man  is  likely  to  make  is  that  of  partnership. 
Comparatively  few  business  enterprises  are  now  conducted  by 
an  individual  alone,  and  professional  men  are  almost  equally  likely 
to  find  it  to  their  advantage  to  unite  their  efforts  for  the  success- 
ful prosecution  of  their  work.  The  ease  and  informality  sur- 
rounding the  formation  of  a  partnership  result  in  the  creation  of 
many  firms  whose  members  have,  at  most,  only  a  hazy  and  indefi- 
nite idea  as  to  the  obligations  which  they  have  assumed.  For  this 
reason  it  is  a  matter  of  far  too  common  occurrence  to  find  the 
courts  engaged  with  suits  for  the  dissolution  of  partnerships  or 
the  adjustment  of  differences  which  have  arisen  between  indi- 
vidual members. 

The  law  of  partnership,  owing  to  the  wide  variety  of  pur- 
poses for  which  firms  are  formed,  presents  a  complex  structure. 
The  layman  who  attempts  to  master  the  subject  finds  himself 
almost  at  once  involved  in  niceties  of  distinction  and  form  from 
which  he  is  able  to  extract  very  little  satisfaction. 

It  is,  however,  as  in  most  other  branches  of  the  law,  entirely 
possible  for  the  layman  to  familiarize  himself  with  general  princi- 
ples, and  to  become  well  informed  as  to  the  dangers  which  should 
be  avoided  when  he  contemplates  entering  a  firm  or  copartnership. 
It  is  probable  that  anyone  of  even  limited  business  experience  has 
a  general  idea  of  what  partnership  is,  but  before  it  is  possible  to 
consider  the  legal  aspects  of  it,  a  formal  definition  must  be  con- 
sidered. Like  other  legal  definitions,  it  must  be  carefully  studied, 
for  it  is  phrased  in  such  a  way  as  to  comprise  all  of  the  essential 
elements  of  the  relationship  which  we  are  considering. 

What  Is  a  Partnership? 

A  partnership  is  an  association  of  two  or  more  persons  who 
have  agreed  to  combine  their  labor,  property  and  skill,  or  some  of 


Lecture  Notes. 


15 


these  things,  for  the  purpose  of  engaging  in  a  legal  trade  or  busi- 
ness and  sharing  the  profits  and  losses  as  such  between  them. 

Persons. 

It  will  be  noted  that  the  number  of  persons  who  may  com- 
prise a  partnership  is  unlimited.  While  a  majority  of  firms  con- 
sist of  from  two  to  four  members,  it  is  of  quite  common  occur- 
rence to  find  some  copartnerships  consisting  of  fifteen  or  twenty. 
This  is  frequently  the  case  in  firms  which  have  international 
and  inter-city  connections.  Whether  the  membership  numbers  two 
or  twenty,  however,  the  relationships  established  are  precisely  the 
same.  Partners  are  classed  as  general  or  special  partners,  a  gen- 
eral partner  having  an  unlimited  liability  for  the  firm  debts,  and 
a  special  partner  having  his  liability  limited  to  a  definite  amount 
which  he  has  contributed  to  the  partnership  assets.  Mention  is 
made  here  of  this  classification  of  partners  in  the  interest  of 
orderly  analysis.  It  will  be  subsequently  discussed  under  the  title 
of  "Limited  Partnership." 

In  order  to  enter  into  the  contract  of  partnership,  an  indi- 
vidual must  have  capacity  as  defined  and  explained  in  the  article 
on  "Contracts." 

Agreement  to  Combine  Assets. 

A  partnership  agreement  is  a  pure  contract  entered  into 
between  the  various  partners,  the  consideration  being  the  mu- 
tual advantages  which  are  expected  to  flow  from  the  rela- 
tionship. Each  partner  contributes  something  to  the  com- 
mon property.  It  may  be  money,  it  may  be  tangible  prop- 
erty, or  it  may  be  individual  skill  or  ability.  All  these  are 
regarded  as  proper  assets  of  a  copartnership.  It  is  a  very  com- 
mon thing  to  find  the  entire  cash  assets  of  a  partnership  supplied 
by  one  of  the  members  and  the  technical  knowledge  or  skill  by 
another.  The  latter  asset  is  often  much  more  valuable  than  the 
former. 

Duration  of  Partnership. 

A  partnership  may  be  for  a  definite  period  of  time,  or  the  date 


H 


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Business  Engineering. 


of  its  expiration  may  be  left  uncertain,  in  which  case  the  contract 
of  partnership  is  a  continuing  one.  In  the  former  instance  the 
contract  expires  upon  the  day  fixed.  In  the  latter  instance  it  con- 
tinues until  it  is  dissolved  by  the  act  of  one  or  both  of  the  partners, 
or  by  operation  of  law.     These  questions  we  will  consider  later. 

Legal  Trade  or  Business.  " 

It  must  be  carefully  noted  that  the  purposes  of  the  partner- 
ship must  be  legal  and  must  contemplate  that  the  partners  are  to 
engage  in  some  business  enterprise  calculated  to  result  in  profit. 
An  association  for  social,  educational  or  philanthropic  purposes 
does  not  constitute  a  copartnership.  Such  organizations  as  these 
fall  under  a  diflferent  branch  of  the  law. 


Profits  and  Losses. 

A  partnership  agreement  contemplates  that  the  burdens  or 
benefits  of  the  operations  of  the  firm  shall  be  shared  by  all  of  the 
partners.  One  who  is  exempted  from  all  responsibility  for  a  firm's 
business  is  not  in  any  sense  a  copartner. 

The  foregoing  considerations  should  be  sufficient  to  consti- 
tute a  foundation  for  the  more  technical  side  of  the  subject  under 
consideration. 


Nature  of  Relationship. 

A  copartnership  is  distinguished  from  a  corporation  by 
the  fact  that  the  latter  has  a  separate  existence  derived 
from  the  sovereign  authority,  while  a  partnership  has  no  ex- 
istence whatever  aside  from  the  personality  of  its  various 
members.  A  corporation  can  act  in  its  own  name  just  as 
a  private  individual  might.  A  partnership  is  obliged  to  act 
through  its  individual  members.  Thus,  a  suit  by  or  against  a 
partnership  is  brought  in  the  name  of  the  individual  members,  as 
for  example,  "John  Doe  and  Richard  Roe,  together  composing 
the  firm  of  Doe  &  Roe."  In  practical  operation  the  partnership  is 
known  by  the  name  of  "Doe  &  Roe,"  and  uses  this  title  for  a 


Lecture  Notes. 


17 


signature  to  checks  and  some  other  informal  purposes.  But  this 
is  done,  not  because  the  firm  of  Doe  &  Roe  has  any  separate 
existence,  but  by  reason  of  the  fact  that  persons  with  whom  the 
copartnership  deals  have  agreed  to  accept  the  signature  of  "Doe  & 
Roe"  in  place  of  the  full  names  of  the  several  partners.  When  a 
firm  name  has  once  been  adopted,  any  one  of  the  partners  is 
authorized  to  use  that  signature.  It  becomes  a  part  of  the  part- 
nership assets. 

Scope  of  Partnership.  '     "   "' 

This  subject  constitutes  one  of  the  most  important  elements 
of  the  partnership  agreement.  In  our  consideration  of  the  subject 
of  agency  a  vital  point  was  the  scope  of  the  authority  which  the 
agent  possessed.  This  was  found  to  be  important  because  of  its 
bearings  upon  the  relations  of  the  agent  with  third  persons. 

Just  as  an  agent  may  be  appointed  for  any  object  or  under- 
taking which  the  principal  may  elect,  so  a  partnership  may  be 
formed  for  any  legal  purpose  which  the  partners  agree.  Rarely  is 
a  partnership  general  in  the  sense  that  its  field  of  operations  is  un- 
limited. Its  operations  are  usually  confined  to  some  particular 
business  or  profession,  and  the  purpose  for  which  a  partnership 
is  formed  is  known  as  the  scope  of  the  partnership. 
Every  partner  is  the  general  agent  of  every  other,  and  ap- 
plying the  principles  of  agency  already  learned,  it  will  be 
noted  that  the  agency  of  one  partner  for  another  is  limited 
to  acts  within  the  scope  of  the  partnership.  Thus,  if  a  firm  be 
formed  for  the  purpose  of  general  construction,  every  partner 
will  be  at  liberty  to  use  the  firm  name,  to  bind  its  credit  and  to 
involve  it.  in  contracts  which  might  legitimately  be  said  to  be 
incident  to  the  purpose  for  which  the  partnership  was  formed.  A 
partner  could  not,  however,  enter  upon  the  purchase  and  sale  of 
stocks,  or  attempt  to  transact  the  business  of  a  broker,  and  in  so 
doing  involve  the  firm  property.  It  would  simply  be  a  case  of  an 
agent  committing  an  unauthorized  act,  and  the  sole  result  would 
be  to  inflict  a  personal  liability  upon  the  partner  attempting  it. 

Practically,  therefore,  it  is  of  the   utmost  importance  that 


i8 


Business  Engineering. 


when  entering  a  partnership  an  individual  should  insist  that  the 
scope  of  the  partnership  should  be  accurately  defined,  and  not  only 
that,  but  having  settled  this  point,  the  prospective  partner  must 
go  beyond  the  agreement  which  he  makes  with  his  future  asso- 
ciates, and  carefully  determine  whether  the  objects  of  the  part- 
nership as  defined  in  this  private  agreement  imply  any  more  ex- 
tensive enterprises,  and  whether  the  operations  so  specified  would 
be  likely  to  lead  the  general  public  to  believe  that  the  partnership 
had  other  purposes  in  view.  As  in  the  case  of  an  agency,  the  gen- 
eral public  will  not  be  bound  by  any  private  agreement  between 
partners  as  to  the  scope  of  the  partnership  or  the  powers  of  its 
respective  members.  Outsiders  are  simply  chargeable  with 
knowledge  of  what  is  apparently  the  business  of  the  firm  and  the 
seeming  powers  of  the  partners.  For  example,  the  partnership 
agreement  might  provide  that  no  partner  should  sign  any  contract 
for  the  partnership  without  submitting  it  to  a  majority  of  the  firm, 
but  this  agreement  would  have  no  effect  upon  an  outsider  who  in 
good  faith  entered  into  a  contract  with  a  member  of  the  firm  who 
was  acting  in  violation  of  this  provision. 

Again,  a  partnership  might  be  formed  for  the  purchase  and 
sale  of  railroad  bonds,  and  by  agreement  the  partners  might  limit 
their  operations  to  this  field.  So  closely  akin,  however,  to  such 
a  business  would  be  the  purchase  and  sale  of  other  negotiable 
securities  that  an  outsider  would  probably  be  justified  in  assuming 
that  one  of  the  partners  had  the  power  to  buy  railroad  stocks  and 
be  protected  in  dealing  with  him,  even  though  such  partner  was 
violating  his  partnership  agreement.  It  is  a  very  simple  thing  to 
enter  into  a  partnership,  but  a  very  difficult  thing  to  escape  from 
subsequent  liability.  Protection  must  be  had  at  the  outset  by  the 
exercise  of  extreme  caution  and  vigilance  in  order  to  arrive  at  a 
thorough  understanding  of  the  liabilities  which  are  about  to  be 
assumed. 

Formation  of  Partnership. 

Like  any  other  contract,  a  partnership  agreement  may  be 
either  in  writing  or  oral.  If  not  in  writing,  it  may  be  either  ex- 
press or  implied. 


Lecture  Notes. 


19 


The  partnership  agreement  should,  by  preference,  always  be 
carefully  expressed  in  writing.  Much  trouble  will  be  avoided  by 
pursuing  this  course.  As  has  been  previously  intimated,  it  should 
contain  a  careful  statement  of  the  objects  of  the  partnership,  its 
duration,  and  the  respective  rights  and  liabilities  of  the  partners 
as  between  themselves.  It  is  a  very  common  thing  to  have  the 
respective  partners  unequally  interested  in  the  firm,  a  certain  per- 
centage of  profits  being  given  to  each.  All  such  questions  should 
be  the  subject  of  careful  and  explicit  expression.  No  one  should 
ever  voluntarily  enter  into  a  partnership  which  is  based  upon  oral 
agreement.  Make  the  written  instrument  as  informal  as  desired, 
but  such  a  paper  should  always  be  in  existence. 


Involuntary  or  Implied  Partnership. 

It  frequently  happens  that,  without  any  intent,  an  individual 
finds  himself  held  as  a  general  partner  in  some  operation  in  which 
he  has  been  engaged.  A  man  may  be  persuaded  by  a  friend  to 
invest  money  in  a  promising  business  proposition.  The  money  is 
placed  in  the  business  with  the  expectation  that  if  the  venture  be 
profitable  the  capitalist  will  share  in  its  prosperity.  He  may  have 
supposed  that  he  was  simply  accommodating  a  friend.  As  a  mat- 
ter of  fact,  in  case  of  disaster  to  the  business,  it  is  quite  as  likely 
as  not  that  some  disappointed  creditor  will  seek  to  make  him  re- 
sponsible as  a  partner,  and  will  probably  succeed. 

No  one,  therefore,  should  permit  himself  to  become  interested 
in  any  business  operation  to  an  extent  of  sharing  in  the  profits 
without  realizing  the  dangerous  relationship  which  he  is  assum- 
ing. If  money  be  loaned  to  another  for  use  in  a  particular  busi- 
ness, its  character  should  be  clearly  defined.  It  should  bear  a 
definite  rate  of  interest,  and  it  must  be  understood  that  such  pay- 
ment is  not  dependent  upon  the  success  or  failure  of  the  business 
operation.  This  last  element  is  generally  said  to  be  the  test  of 
a  true  partnership,  namely,  the  sharing  in  profits  and  losses.  If 
this  point  be  borne  in  mind,  there  is  little  danger  in  becoming 
involved  in  an  involuntary  partnership. 


20 


Business  Engineering. 


m 


Inter-relation  of  Partners. 

The  student  who  has  mastered  the  principles  of  agency  needs 
little  added  information  upon  this  branch  of  the  subject.  As 
between  themselves  the  relations  of  partners  are  precisely 
what  they  may  agree  in  their  articles  of  partnership.  Again, 
let  it  be  noted  that  this  does  not  necessarily  mean  that  such 
agreements  will  be  binding  upon  outsiders,  but  the  responsi- 
bility of  one  partner  to  another  is  determined  thereby.  The 
partners  become  joint  owners  of  all  the  partnership  property 
in  the  proportion  defined  by  the  partnership  agreement.  As  has 
been  said,  each  partner  is  the  general  agent  of  every  other  partner 
for  the  purposes  of  the  partnership.  This  general  agency  may,  as 
between  the  partners,  be  limited  by  the  partnership  agreement, 
and  one  partner  may  have  more  power  than  another.  This,  how- 
ever, is  a  private  matter  between  them. 

The  question  of  the  interest  of  one  partner  in  firm  property  is 
somewhat  complicated  by  reason  of  the  fact  that  a  partner, 
although  he  undoubtedly  possesses  property  rights  in  the  partner- 
ship assets,  cannot  assign  his  interest  to  anyone  else.  This  springs 
from  the  fact  that  the  relation  of  partners  is  so  intimate  and  close 
that  the  law  will  not  compel  the  introduction  of  a  new  partner 
not  acceptable  to  all  of  the  old  partners.  If  A  is  a  partner  of 
B  and  C,  he  cannot  assign  his  interest  to  D,  and  thereby  make  D  a 
partner.  B  and  C  would  have  undoubted  right  to  protest.  But 
if  the  term  of  the  partnership  is  indefinite,  so  that  it  may  be 
dissolved,  A  may  insist  that  all  of  the  partnership  assets  shall  be 
turned  into  cash  and  withdraw  his  interest.  A  concrete  example 
will  illustrate  this  point: 

A  and  B  decide  to  purchase  a  growing  crop  of  hay  for  $ioo, 
each  contributing  $50  of  the  purchase  price.  A  becomes  desirous 
of  disposing  of  his  interest  and  sells  it  to  C.    He  may  do  so. 

Let  us  suppose,  however,  that  A  and  B  are  partners  and  the 
partnership  of  A  and  B  buys  the  growing  crop.  Under  these  cir- 
cumstances A  has  no  right  to  sell  his  interest,  for  by  so  doing  he 
would  attempt  to  bring  into  the  partnership  a  third  person.  If 
the  partnership  were  subject  to  dissolution,  A's  proper  course 


Lecture  Notes. 


21 


would  be  to  insist  that  the  growing  crop  should  be  sold  and  the 
money  divided. 

If  there  are  more  than  two  partners,  in  the  absence  of  ex- 
press agreement,  and  generally  speaking,  a  majority  of  the  part- 
ners will  control  the  operations  of  the  firm.  If  there  are  only 
two  partners,  it  is  quite  possible  that  a  disagreement  may  result  in 
a  total  stoppage  of  business.  The  Articles  of  Partnership  in  such 
a  case  should  always  provide  for  a  determination  of  such 
questions. 

In  case  of  the  insolvency  of  the  partnership,  if  a  creditor 
collect  his  entire  debt  from  one  partner,  as  we  shall  subsequently 
see  he  may,  such  partner  has  a  right  of  action  against  his  associate 
partners  for  their  proportionate  share  of  the  debt.  This  is  what 
is  known  as  "contribution,"  and  is  again  explained  by  the  fact  that 
the  respective  liability  of  partners  for  firm  debts  is  a  matter  of 
private  agreement  among  them. 

Relation  of  Partners  to  Outsiders. 

Here  we  face  the  most  serious  question  of  partnership 
law.  Every  person  who  enters  into  a  general  partnership 
becomes  personally  liable  to  the  extent  of  his  entire  fortune 
for  the  debts  of  the  partnership.  If,  on  the  bankruptcy  of 
a  firm  it  should  be  found  that  one  partner  was  possessed 
of  outside  resources,  while  the  other  members  of  the  copart- 
nership were  personally  bankrupt,  the  creditors  of  the  firm 
might  look  to  the  one  solvent  partner  for  repayment  of  all  of  the 
firm's  debts.  When  this  phase  of  the  case  is  coupled  with  the 
power  which  one  partner  has  to  bind  the  firm,  it  will  be  seen  that 
one  who  enters  a  partnership  is  treading  upon  dangerous  ground, 
so  dangerous,  in  fact,  that  the  trend  of  modern  business  is  away 
from  partnerships  and  toward  the  formation  of  corporations  where 
the  individual  liability  of  those  interested  is  limited  to  the  amounts 
of  capital  which  they  have  invested  in  the  enterprise.  Those  who 
deal  with  a  firm  are  justified  in  negotiating  with  any  one  of  its 
members,  and  will  be  protected  in  the  agreements  which  they 
make  with  any  of  the  partners,  unless  they  have  actual  knowl- 


22 


Business  Engineering. 


I ; 


edge  that  such  partner  is  limited  in  his  authority.  It  hardly  need 
be  said  that  if  an  outsider  were  given  a  copy  of  the  partnership 
agreement,  he  would  then  be  bound  in  his  dealings  with  the  part- 
nership by  its  terms,  but  this  course  is  obviously  impossible.  Out- 
siders in  dealing  with  a  firm  are  simply  chargeable  with  knowl- 
edge of  the  general  business  of  the  firm,  the  customs  of  the  trade 
or  profession  in  which  it  engages,  and  such  general  information 
of  that  particular  partnership  and  its  method  of  doing  business 
as  they  have  acquired  from  past  dealings.  Having  in  mind 
the  information  derived  from  these  various  sources,  if  an  out- 
sider acts  with  ordinary  and  reasonable  diligence  and  prudence, 
he  will  find  that  he  will  be  protected  in  his  dealings  with  the  firm, 
and  may  hold  any  of  the  partners  liable  for  the  contracts  which 
he  makes  with  it. 

It  has  been  said  that  firm  creditors  may  not  only  satisfy  their 
claims  out  of  property  which  is  actually  owned  by  the  partnership, 
but  after  this  has  been  exhausted  may  look  to  the  private  re- 
sources of  the  partners,  but  the  converse  is  not  true.  Individual 
creditors  of  a  partner  have  no  right  to  seize  upon  partnership 
property,  as  such,  in  order  to  satisfy  personal  liabilities  of  any  one 
of  the  members.  Such  property  may  be  reached,  but  by  a  different 
procedure.  As  will  be  shortly  seen,  the  insolvency  of  a  partner 
dissolves  the  partnership,  whether  the  term  for  which  it  was 
formed  has  expired  or  not.  If,  therefore,  one  partner  becomes 
insolvent,  it  is  generally  customary  for  his  creditors  to  apply  for 
a  formal  dissolution  of  the  partnership,  a  sale  of  its  assets,  and  a 
distribution  to  each  partner  of  his  interest  therein.  The  interest 
of  the  bankrupt  partner  in  the  firm  can  then  be  seized  by  his  per- 
sonal creditors.  A  personal  creditor  of  one  partner,  however, 
would  never  be  allowed  to  actually  acquire  an  interest  in  a  going 
concern,  for  here  again  it  would  enable  him  to  enter  into  a  con- 
fidential relationship  with  the  other  members  of  the  firm,  which 
the  law  would  not  permit,  against  their  will. 

Limited  Partnership. 

In  order  to  avoid  the   severe  liability   of  a  general   part- 
ner,   the    law    has    provided    that    what    is    known    as    a    *'lim- 


Lecture  Notes. 


23 


ited  partnership"  may  be  formed.  A  firm  may  be  composed 
of  general  and  special  partners.  To  the  general  partners,  who 
are  liable,  as  above  noted,  falls  the  care  and  conduct  of  the 
business.  The  special  partner  merely  contributes  to  the  firm's 
assets  a  definite  sum  of  money,  which  he  puts  at  the  hazard  of  the 
business.  In  return  he  draws  such  share  of  the  profits  as  may  be 
agreed  upon.  The  special  partner,  however,  cannot  be  active  in 
the  management  of  the  business,  or  conduct  its  operations  save  in 
an  advisory  capacity  to  the  general  partners.  The  liability  of 
such  a  special  partner  is  limited  to  the  amount  of  capital  which 
he  puts  into  the  firm,  and  firm  creditors  cannot  look  to  his  private 
resources.  It  should  be  noted  that  no  firm  can  consist  exclusively 
of  special  partners.  There  must  always  be  one  or  more  general 
partners  to  conduct  its  affairs.  The  formation  of  a  special  or 
limited  partnership  is  extremely  technical,  and  the  cases  are 
numerous  where  a  failure  to  fulfill  technical  requirements  of 
statute  has  resulted  in  holding  those  who  supposed  themselves  to 
be  special  partners  to  the  liability  of  general  partners.  No  one 
should  ever  attempt  to  form  a  special  partnership  without  legal 
assistance. 

Dissolution  of  Partnership. 

A  partnership  may  be  dissolved  by  any  of  the  following 

causes : 

1.  By  limitation. 

2.  By  death  or  insolvency  of  one  or  more  of  the  partners. 

3.  Business  becoming  illegal. 

4.  By  act  of  the  partners. 

5.  By  judicial  action. 

I.  If  the  term  of  the  partnership  is  fixed  by  the  partnership 
agreement,  a  dissolution  occurs  on  the  date  fixed,  without  further 
act  of  the  partners.  If  it  is  desired  to  continue  the  partnership 
longer,  a  new  agreement  should  be  entered  into.  Unfortunately, 
it  is  very  common  for  partners,  at  the  expiration  of  the  original 
partnership,  to  take  no  action  and  proceed  to  carry  on  the  business 
as  if  the  agreement  was  still  in  force.    This  method  is  satisfactory 


24 


Business  Engineering. 


n 


so  long  as  no  disputes  arise,  but  in  the  eye  of  the  law,  on  the  date 
fixed  for  the  original  partnership  that  firm  passes  out  of  existence, 
and  while  the  original  partnership  agreement  may  be  of  value  to 
determine  the  terms  of  the  subsequent  agreement,  which  is  in 
effect  merely  an  oral  one,  yet  in  fact  the  original  agreement  is  of  no 
binding  force  whatever.  Care  should  be  taken  to  mark  the  date  of 
expiration  of  the  partnership,  and  at  the  appropriate  time  new 
articles  should  be  signed. 

2.  The  death  or  bankruptcy  of  a  partner  immediately  ter- 
minates the  relationship,  for,  as  has  been  previously  noted,  the 
law  will  not  permit  the  personal  representatives  of  a  deceased 
partner  or  the  assignee  of  a  bankrupt  to  become  partners 
in  the  firm  against  the  wish  of  the  surviving  partners.  In  some 
cases,  of  course,  the  surviving  partners  give  their  consent,  and  the 
estate  of  a  deceased  partner  is  represented  in  the  future  business, 
but  this  is  in  the  eye  of  the  law  the  formation  of  a  new  partnership. 

3.  If  a  case  can  be  conceived  where  a  change  in  the  law  ren- 
ders illegal  the  business  carried  on  by  a  partnership,  it  would  at 
once  follow  that  the  partnership  would  at  that  moment  be  dis- 
solved, for  the  courts  would  not  extend  their  protection  to  an 
association  or  to  individuals  engaged  in  violating  the  law. 

4.  The  most  common  method  in  which  a  partnership  is 
dissolved  is  by  the  act  of  the  partners  themselves. 

It  is  hardly  necessary  to  say  that  a  partnership  might  be  dis- 
solved at  any  time  by  the  unanimous  consent  of  the  partners.  If 
it  is  for  an  indefinite  period,  any  one  of  the  partners  may  at  any 
time  withdraw  from  the  firm.  This  must  be  done  with  due  regard 
to  what  is  fair  and  just  to  the  surviving  partners,  due  notice  being 
given  and  other  precautions  being  taken.  In  this  country  it  has 
also  been  held  that  even  though  the  term  for  which  the  partner- 
ship is  formed  has  not  yet  expired,  one  of  the  partners  may  with- 
draw therefrom,  although  by  so  doing  he  lays  himself  open  to  an 
action  for  breach  of  contract.  But  the  courts  have  declared  it  to 
be  the  policy  of  our  law  that  no  man  shall  be  compelled  to  remain 
in  a  partnership  after  the  personal  relations  of  the  partners. have 
become  so  changed  as  to  jeopardize  the  success  of  the  business. 


Lecture  Notes. 


25 


5.  If  the  relations  of  one  partner  to  his  associates  become  so 
strained  that  it  is  manifestly  impossible  to  continue  the  association, 
or  if  the  business  carried  on  by  the  partnership  becomes  unprofita- 
ble, any  one  of  the  partners  may  apply  to  the  court  for  a  dissolu- 
tion, and  the  court  will  extend  its  aid  to  effect  this  result.  In  gen- 
eral, a  receiver  will  be  appointed  for  the  assets  of  the  partnership, 
its  affairs  will  be  wound  up  with  all  convenient  speed,  and  a  dis- 
tribution made  among  the  partners  of  their  respective  interests. 
This  method  of  procedure  is  one  which  is  often  invoked,  and  pro- 
vides the  safe  avenue  of  escape  from  a  position  which  becomes 
untenable.  In  case  of  the  dissolution  of  a  partnership,  the  part- 
nership assets  are  distributed  as  follows: 

a.  All  debts  of  the  firm  to  outsiders  are  paid.  If  there  are 
not  sufficient  assets  to  satisfy  these  claims,  each  partner  must  con- 
tribute his  proportionate  share  to  make  up  the  deficit.  If  any  one 
of  the  partners  is  unable  to  do  so,  the  share  of  such  an  one  must 
be  made  up  by  the  other  members  of  the  copartnership. 

b.  After  payment  of  all  claims  to  persons  other  than  the  part- 
ners, repayment  is  made  of  money  which  has  been  loaned  to  the 
firm  by  the  individual  partners.  In  default  of  sufficient  assets 
to  repay  these  loans,  they  should  be  paid  ratably. 

c.  Next  in  order  will  be  the  repayment  of  capital  invested  by 
the  partners.  If  insufficient  funds  are  available  to  repay  capital 
in  full,  the  partners  should  be  reimbursed  proportionately  to  the 
amount   which  they  contribute. 

d.  Any  sums  remaining  after  the  payment  of  the  foregoing 
liabilities  should  be  distributed  among  the  partners  in  proportion 
to  their  interests  in  the  partnership,  as  defined  by  the  Articles  of 
Partnership. 


I 


Notice  of  Dissolution. 

Under  the  subject  of  agency  we  considered  the  neces- 
sity of  giving  ample  notice  of  the  termination  of  an  agent's 
powers.  The  same  is  true  in  the  case  of  the  termination  of 
a  partnership.  There  is  always  danger  in  the  event  that  a  part- 
nership has  terminated  in  a  disagreement  of  the  partners,  that  one 


^ 


2$  Business  Engineering. 

of  the  partners  may,  subsequently  to  the  dissolution,  involve  his 
firm  associates  in  obligations  of  which  they  are  ignorant.  Par- 
ticularly is  this  true  if  there  is  any  suspicion  of  dishonesty  or 
double  dealing.  Upon  the  dissolution  of  a  partnership  all  reason- 
able precaution  should  be  taken  to  give  wide  publicity  to  the  fact. 
This  is  generally  accomplished  by  advertising  for  a  more  or  less 
extended  period  in  the  public  press  that  the  firm  no  longer  exists. 
In  addition,  notice  should  be  sent  to  all  those  with  whom  the  part- 
nership has  done  business,  so  that  personal  notice  may  be  received 
as  far  as  possible.  Having  taken  these  precautions,  it  is  altogether 
probable  that  no  further  liability  will  be  incurred.  It  should  be 
said  that  the  law  does  not  require  that  upon  the  dissolution  of  a 
partnership  actual  notice  should  be  given  to  everyone  with  whom 
any  one  of  the  retiring  partners  might  possibly  deal.  It  is,  how- 
ever, required  that  such  steps  should  be  taken  that  the  court  will 
be  able  to  say  that  all  reasonable  efforts  were  made  to  effect  this 
result.  The  course  pursued  may  vary  in  different  cases,  depend- 
ing upon  the  nature  and  extent  of  the  business  of  the  part- 
nership. 


Lecture  Notes. 


27 


tion  and  character.  It  must  be  remembered  that  each  partner 
holds  the  honor,  reputation  and  financial  standing  of  each  of  his 
associates  in  his  keeping.  Such  a  responsibility  is  one  which  is 
not  to  be  lightly  assumed  or  conferred.  If,  after  the  formation  of 
a  partnership,  events  should  transpire  which  create  dissension 
between  the  partners,  or  create  the  slightest  doubt  of  the  probity 
or  ability  of  an  associate,  the  partnership  should  be  terminated  at 
once  at  any  hazard.  It  is  impossible,  as  a  practical  matter,  for  a 
partnership  to  long  continue  after  the  destruction  of  mutual  con- 
fidence and  faith.  There  have  been  cases  where  partners  who 
were  personally  hostile  to  each  other  have  merged  their  private 
feelings  in  their  business  judgment,  and  have  continued  success- 
fully the  business  of  the  firm,  but  such  a  course  is  almost  certainly 
foredoomed  to  failure,  and  the  attempt  to  effect  this  result  should 
never  be  made  if  it  can  possibly  be  avoided. 


Conclusion. 


It  will  be  obvious  from  the  foregoing  that  the  relation- 
ship of  one  partner  to  another  is  of  a  nature  so  extremely 
confidential  and  close  that  it  is  not  unreasonable  that  the  law  re- 
quires, as  between  the  partners,  the  utmost  good  faith  and  honesty. 
No  one  partner  should  be  allowed  to  make  a  personal  profit  out  of 
the  partnership  business  which  is  not  shared  by  his  associates. 
Each  has  a  right  to  expect  and  exact  from  every  other  partner 
that  the  interests  of  the  partnership  shall  be  placed  before  the 
interests  of  any  individual  member.  The  common  weal  of  the 
firm  must  be  the  first  care  of  its  members,  and  the  slightest  lapse 
from  the  highest  standard  of  personal  rectitude,  or  honest  and 
fair  dealing,  is  certain  to  involve  the  partners  in  discussion  and 
litigation,  which  in  the  vast  majority  of  cases  is  acrimonious  and 
bitter  to  a  degree.  Do  not  take  a  partner  without  the  most  care- 
ful and  minute  scrutiny  of  his  previous  business  dealings,  reputa- 


NEGOTIABLE  INSTRUMENTS. 

The  problem  of  transferring  financial  credits  without  the  ac- 
tual payment  of  money  or  other  standards  of  value  is  one  which 
confronts  every  business  or  professional  man.  Its  origin  was  almost 
coincident  with  business  dealings  between  men,  and  the  methods 
of  solving  it  have  grown  and  developed  step  by  step  with  economic 
progress,  until  today  99  per  cent,  of  all  financial  dealings  are  ac- 
complished without  the  use  of  actual  cash.  The  history  of  this 
development  is  one  of  absorbing  interest  to  the  student  of  econom- 
ics, but  would  be  out  of  place  in  a  consideration  of  practical  busi- 
ness methods.  A  few  words  of  explanation,  however,  will 
simplify  the  technical  points  to  be  considered. 

What  Is  a  Negotiable  I nstrumentf— Taking  the  most  com- 
mon form  of  negotiable  paper,  namely,  government  notes  or  bills, 
it  will  at  once  be  noticed  that  the  most  striking  attribute  possessed 
by  them  is  the  freedom  with  which  they  pass  current.  A  govern- 
ment note  is  simply  the  promise  of  the  United  States  to  pay  the 
bearer  on  demand  a  specified  sum  of  gold,  which  is  our  standard 
medium  of  exchange.  It  has  absolutely  no  intrinsic  value.  Its 
worth  is  based  solely  upon  the  financial  credit  of  the  government, 
yet  it  passes  current  freely  at  its  face  value.  If  the  credit  of  the 
government  became  impaired,  the  value  of  its  outstanding  notes 
would  be  proportionately  diminished.  An  example  of  this 
occurred  during  our  civil  war. 

A  gold  note  passes  from  hand  to  hand  until  physically  de- 
stroyed. It  is  as  good  in  the  hands  of  one  person  as  another. 
No  one  makes  any  inquiry  about  a  previous  owner.  It  is  equally 
valuable  in  the  hands  of  a  thief  who  steals  it  as  in  the  custody 
of  one  who  comes  by  it  honestly.  This  quality  is  denominated  its 
negotiability.  A  gold  note  is  the  best  example  of  completely 
negotiable  paper. 

Like  government  notes  are  those  issued  by  banks,  save  for  the 
fact  that  the  credit  upon  which  they  are  based  is  technically  that 


Lecture  Notes. 


29 


of  the  bank  which  issues  them.  In  practical  operation,  however, 
under  our  financial  system  an  issue  of  notes  by  a  bank  is  secured 
by  a  reserve  fund  sufficient  to  obviate  any  necessity  of  investigat- 
ing the  financial  standing  of  the  institution. 

But  it  is  obvious  that  even  the  convenience  of  having  govern- 
ment and  bank  notes  does  not  provide  for  all  the  exigencies  of 
modern  business,  and  consequently  we  find  individuals  issuing  their 
personal  notes  for  specified  amounts.  These  notes  constitute  a 
pure  contract  for  the  payment  of  money,  but  it  is  a  form  of  con- 
tract having  special  attributes,  arising  out  of  the  policy  of  the 
law  to  protect  and  facilitate  the  safe  transaction  of  business. 

It  is  these  special  attributes  which  give  rise  to  the  body  of 
law,  known  as  the  Law  of  Negotiable  Instruments. 

The  interest  of  a  party  in  an  ordinary  contract  can  generally 
be  assigned.  That  is,  unless  the  agreement  contemplates  the  per- 
sonal efforts  of  one  of  the  parties,  a  party  can  transfer  his  interest 
to  a  third  person.  Such  third  person  thereafter  occupies  pre- 
cisely the  same  position  as  the  original  party. 

This  quality  of  a  contract  is  known  as  its  assignability.  But 
it  is  obvious  that  such  third  person  occupies  no  better  position  than 
his  predecessor.  In  the  event  of  a  dispute  over  the  contract  he  is 
as  much  involved  as  though  he  were  an  original  party.  Hence  he 
must  investigate  in  each  case  not  only  the  standing  of  the  other 
parties  to  the  contract,  but  also  its  terms. 

Obviously,  a  contract  weighted  with  these  drawbacks  could 
not  pass  current  in  the  business  world  as  an  equivalent  of  money. 
Something  more  is  required  of  such  an  instrument.  The  holder 
of  it  must  by  looking  at  it,  gain  all  the  information  necessary  to 
form  his  judgment  of  it,  and  he  must  be  sure  that  nothing  arising 
out  of  the  personal  relations  of  the  original  parties  will  embarrass 
his  title.  He  must  be  free  from  the  possible  disputes  which  might 
arise  between  then.  When  he  is  in  possession  of  such  an  instru- 
ment he  has  one  which  is  negotiable,  instead  of  merely  assignable. 
This  distinction  must  be  kept  clearly  in  mind.  It  will  therefore 
be  seen  that  the  person  who  holds  a  negotiable  instrument  at  sec- 
ond hand,  that  is,  a  transferee  of  it,  is  often  in  a  better  position 
than  the  person  from  whom  he  obtained  it.    Thus,  A  makes  a  note 


30 


Business  Engineering. 


Lecture  Notes. 


31 


< , 


to  B  to  pay  for  certain  services  alleged  to  have  been  rendered.  B 
transfers  it  to  C.  So  long  as  the  note  remains  in  the  hands  of 
B,  A  may  resist  its  collection  on  the  ground,  perhaps,  that  it  has 
subsequently  developed  that  the  services  were  improperly  ren- 
dered ;  but  once  the  note  passes  in  due  course  to  C,  A's  defense  is 
gone,  and  he  must  pay  the  amount  of  the  note. 

This  attribute  of  negotiable  instruments  is  a  purely  arbitrary 
one,  and  finds  its  reason  and  sanction  in  the  general  consideration 
that  it  is  for  the  public  good  that  business  should  be  facilitated. 

So  much  by  way  of  example,  and  to  point  the  distinction  be- 
tween an  assignable  and  a  negotiable  instrument. 

The  importance  to  business  and  professional  men  of  some 
knowledge  of  the  law  of  negotiable  instruments  is  perhaps  more 
obvious  than  in  other  branches  of  the  law.  Its  field  covers  the 
practical  transactions  of  everyday  life.  Notes  and  checks  are  as 
common  as  bills  and  silver.  Their  function  and  the  rules  regard- 
ing them  are  all  important. 

Hitherto  we  have  spoken  only  of  notes  as  examples  of  nego- 
tiable paper,  but  the  classification  also  includes  drafts  or  bills  of 
exchange  and  checks.     These  we  will  discuss  in  due  course. 

Essential  Elements  of  Negotiable  Paper. 

While  the  general  form  of  a  negotiable  instrument  is  not  im- 
portant, there  are  certain  elements  which  must  always  be  present. 
They  are  as  follows: 

a.  Written  Instrument. — The  instrument  must  be  in  writing 
and  signed.    This  is,  of  course,  in  the  interest  of  accuracy. 

b.  Unconditional  Order  or  Promise. — There  must  always  be 
an  unconditional  promise  or  order  to  pay  in  money,  for  if  the  obli- 
gation or  direction  expressed  in  the  paper  is  in  any  way  qualified, 
it  at  once  injects  an  element  of  uncertainty  into  the  transaction, 
which  would  prevent  any  third  person  from  relying  upon  its  terms. 

c.  Definite  Amount. — The  amount  of  the  payment  must  be 
definite,  otherwise  there  would  be  no  certainty  as  to  the  value  of 
the  paper. 


d.  Definite  Date. — It  must  be  payable  at  a  time  definitely 
stated,  or  which  may  be  certainly  determined.  Any  ambiguity  as 
to  the  date  of  payment  is  fatal.  A  note  payable  "on  demand"  or 
at  a  fixed  time  after  the  happening  of  any  event  which  is  certain 
to  occur,  is  allowable. 

e.  Payable  to  ''Bearer"  or  to  "Order." — If  an  instrument  is 
simply  made  payable  to  a  definite  individual  it  is  not  negotiable, 
for  it  confers  no  power  to  transfer  to  another.  It  should  always 
read  payable  to  "the  order"  of  such  a  person,  thus  giving  author- 
ity to  the  payee  to  name  someone  else  to  receive  the  proceeds  of 
the  instrument. 

An  instrument  drawn  to  "bearer"  is  good  in  the  hands  of  any 
person  into  whose  possession  it  may  come. 

/.  Name  of  Person  to  Whom  Order  is  Directed. — In  the  case 
of  a  check  or  draft,  the  instrument  must  designate  the  person 
who  is  authorized  to  make  the  payment  specified. 

g.  Delivery  (i.  e.,  transfer  of  possession  with  intent  to  trans- 
fer title). — An  undelivered  bill  or  note  is  inoperative. 

Definition  of  Terms. 

One  who  signs  and  issues  a  note  is  known  as  the  maker. 
The  person  to  whom  it  is  payable  is  denominated  the  payee.  If 
the  payee  transfers  the  instrument  he  becomes  the  transferor, 
and  if  he  endorses  it,  the  endorser.  The  person  to  whom  it  passes 
becomes  the  transferee  or  endorsee. 

One  who  signs  a  check  or  draft  is  known  as  the  drawer. 
The  person  to  whom  the  draft  or  check  is  payable  is  the  payee, 
and  the  one  to  whom  it  is  directed  is  known  as  the  drawee. 

Common  Forms  of  Negotiable  Instruments. 

Note. 

$1,000.  New  York,  January  2,  1905. 

Six  months  after  date  I  promise  to  pay  to  the  order  of 

(Payee) 

John  Doe  One  Thousand  Dollars,  for  value  received,  at  No.  i 
Broadway,  New  York,  with  interest. 

(Maker) 

Richard  Roe. 


I 


i 


i^i 


32 

Check. 
No.  5. 


Business  Engineering. 


New  York^  January  2,  1905. 

(Drawee) 

National  Bank  of  New  York. 

(Payee) 

Pay  to  the  order  of  John  Doe 
One  Thousand Dollars 

$1,000.  (Drawer) 

Richard  Roe. 


Bill  of  Exchange  or  Draft. 
$1,000. 


New  York,  January  2,  1905. 

(Payee) 


Ten  days  after  sight,  pay  to  the  order  of  John  Doe,  One 
Thousand  Dollars,  value  received,  and  charge  to  my  account 
To 

(Drawee) 

John  Smith  &  Co., 

30  Broad  Street, 
New  York. 


(Drawer) 

Richard  Roe. 


It  will  be  noted  that  a  check  is  practically  a  draft  on  a  bank, 
payable  on  demand  or  "at  sight." 

For  all  practical  purposes,  therefore,  negotiable  instruments 
are  of  two  kinds,  promissory  notes  and  drafts.  In  practice,  a 
check  is  used  to  draw  on  a  firm  or  institution  where  money  is  kept 
on  deposit  for  that  express  purpose,  while  a  draft  proper  is  used 
to  withdraw  special  credits  from  business  houses. 

Acceptance  of  Drafts. — A  draft  is  said  to  be  accepted  when 
the  drawee  acknowledges  the  obligation.  This  is  usually  done 
by  writing  across  the  face  of  the  check  or  bill  the  word  "ac- 
cepted," followed  by  the  name  of  the  drawee.  Banks  in  accept- 
ing checks  usually  write  the  word  "certified." 

The  effect  of  accepting  a  draft  is  to  charge  the  acceptor  with 
liability  for  the  amount  involved.  It  becomes  his  obligation. 
Until  then  the  acceptor  is  under  no  liability  whatsoever.  He  has 
not  become  a  party  to  the  instrument. 


Lecture  Notes.  33 

Transfer  of  Negotiable  Instruments. 

A  negotiable  instrument  is  transferred  by  endorsement  and 
delivery  for  value,  before  maturity  and  without  notice  of  any 
defects. 

An  instrument  is  endorsed  by  the  payee  writing  upon  the 
back  his  name  and  such  other  direction  as  he  may  see  fit.  The 
following  are  the  usual  forms  : 

1.  Blank  Endorsement. — When  a  payee  simply  writes  his 
name  upon  the  back  of  a  negotiable  instrument  it  operates  as 
though  the  paper  had  originally  been  made  payable  to  "Bearer." 
Thereafter  it  is  good  in  the  hands  of  any  person  to  whom  it  may 
come. 

2.  Restrictive  Endorsement. — If  the  payee  endorses  the 
check  by  designating  some  definite  person  to  whom  payment  is  to 
be  made,  he  restricts  the  payment  to  that  single  individual,  thus — 

Pay  to  the  order  of  John  Smith. 
John  Doe. 

Here  only  John  Smith  can  collect  the  amount  originally  pay- 
able to  John  Doe. 

J.  Endorsement    Without   Recourse. — It   sometimes   occurs 
that  it  is  desirable  to  endorse  an  instrument  without  incurring  the 
liability  which,  we  shall  presently  see,  usually  attends  the  act.    In 
this  case  the  endorsement  should  read : 
Endorsed  without  recourse. 
John  Doe. 

In  endorsing  an  instrument  care  should  be  taken  that  the 
payee  sign  upon  the  back  precisely  the  same  name  which  appears 
on  the  face  of  the  check.  Thus,  if  a  check  be  drawn  to  the  order 
of  John  Doe,  it  should  never  be  endorsed  J.  Doe  alone.  Even  if 
the  payee  be  erroneously  named  on  the  face  of  the  check,  it  should 
be  endorsed  in  the  same  form  on  the  back  and  the  error  rectified 
by  adding  the  correct  name. 

The  matter  of  exact  endorsement  is  important. 

A  paper  may  be  endorsed  as  many  times  as  desired  by  suc- 
cessive holders. 


1 


34 


Business  Engineering. 


Lecture  Notes. 


35 


ti 


%.■ 


I 


Liability  of  Endorsers. 

Unless  an  endorsement  be  without  recourse,  each  endorser 
becomes  a  surety  for  the  payment  of  the  instrument  when  due. 
Extreme  care  should  be  taken,  therefore,  not  to  endorse  commer- 
cial paper  unless  there  is  a  willingness  to  become  liable  for  its 
collection. 

Value  Received  for  Transfer. 

In  order  to  preserve  its  character  of  negotiability  an  instru- 
ment must  be  transferred  for  a  valuable  consideration.  In  other 
words,  if  no  value  be  given  when  the  note  is  received,  the  trans- 
feree is  not  given  the  protection  usual  to  the  holder  of  a  negotiable 
instrument.  Like  the  consideration  for  any  other  contract,  this 
"value"  may  take  a  variety  of  forms,  but  in  some  form  it  must  be 
present. 

Maturity. 

A  negotiable  instrument  is  said  to  mature  upon  the  date  it  is 
payable.  A  transfer  by  endorsement,  to  be  valid,  must  be  effected 
before  that  date. 

The  law  presumes  that  negotiable  instruments  will  be  paid 
when  due  and  makes  no  attempt  to  protect  those  who  receive  them 
after  due  date. 

Without  Notice  of  Defect. 

It  is  obvious  that  one  who  receives  a  negotiable  instrument 
will  only  be  protected  if  acting  in  good  faith.  If,  as  a  matter  of 
fact,  one  receives  such  an  instrument,  knowing  of  some  fact  which 
destroys  its  value,  he  will  not  be  protected  from  the  consequences. 

Innocent  Holder. 

One  who  receives  a  negotiable  instrument,  for  value  before 
maturity,  and  in  good  faith,  is  said  to  be  an  innocent  holder,  and 
the  paper  is  said  to  have  been  transferred  in  due  course. 

The  way  is  now  clear  for  a  consideration  of  the  position 


occupied  by  an  innocent  holder  of  a  negotiable  instrument.  Let 
us  suppose  that,  on  the  ist  of  June,  C  is  offered  by  B  a  note  for 
$i,ooo,  dated  April  i,  payable  three  months  after  date  to  the 
order  of  B,  and  signed  by  A.  B  is  ready  to  properly  endorse  the 
note.  C  knows  that  A  is  entirely  responsible;  he  therefore  pays 
B  $i,ooo  and  receives  the  note. 

It  will  be  noted  that  C  paid  value  for  the  note,  that  he  re- 
ceived it  before  it  was  payable,  and  we  assume  that  he  knew  of  no 
defect  in  the  note  which  would  diminish  its  value.  Cs  position  is 
as  follows :  When  the  time  arrives  for  the  presentation  of  the  note, 
being  an  innocent  holder  of  the  instrument,  there  is  no  danger  that 
A  will  contest  the  validity  of  the  instrument  by  reason  of  any 
defects  growing  out  of  the  relationship  between  A  and  B.  It 
may  be  that  had  the  note  remained  in  B's  possession,  A  might 
have  refused  payment,  as  has  been  previously  noted,  upon  the 
ground  that  B  had  given  no  consideration  for  the  note,  or  that 
the  consideration  had  failed,  or  that  B  was  already  indebted  to 
him  in  other  transactions.  Such  defenses  as  these  are  known  as 
personal  defenses  and  concern  the  equitable  questions  arising 
between  A  and  B.  They  are  sometimes  called  the  equities  of  the 
transaction.  The  instant,  however,  that  B  transferred  the  note 
to  C,  an  innocent  holder,  the  paper  being  negotiable,  and  under 
the  protection  of  the  law  of  negotiable  instruments,  all  such 
personal  defenses  were  nullified,  and  A  will  not  be  heard  to  say 
that  there  was  any  lack  of  consideration  for  the  note  or  that  there 
is  any  equitable  reason  why  it  should  not  be  paid.  In  legal 
phraseology  this  condition  of  affairs  is  expressed  by  saying  that 
the  transfer  of  negotiable  instruments  to  an  innocent  party,  in  due 
course,  ''cuts  off  the  equities." 

If,  however,  C  had  taken  the  note  from  B  after  the  date  fixed 
for  payment,  the  above  state  of  facts  would  be  altered.  By 
so  doing,  he  would  cease  to  be  an  innocent  holder  in  due  course, 
and  while  the  transfer  from  B  would  serve  as  an  assignment  of 
any  interest  which  B  had  in  the  note,  C  would  take  it  subject  to 
all  the  equitable  defects  in  B's  title.  A  similar  state  of  facts  would 
arise  if  C  paid  no  consideration  for  the  transfer  or  if  he  had 
actual  knowledge  of  an  equitable  defense  to  the  note.    Under  any 


» 


36 


Busin ess  E ngineering. 


Lecture  Notes. 


37 


11 


% 


of  these  circumstances  the  note  would  have  ceased  to  be  nego- 
tiable and  would  simply  be  assignable,  and  C  would,  therefore, 
receive  no  better  title  than  B  possessed. 

There  is,  however,  another  class  of  defects  in  negotiable 
paper,  which  are  known  as  real  defects.  Thus,  if  A  draw  a  note, 
sign  it,  and  place  it  in  his  desk,  with  no  intention  of  delivering 
it  or  having  it  become  operative,  and  the  note  be  thereafter  stolen 
and  negotiated,  it  is  obvious  that  there  is  a  defect  in  the  paper 
itself.  Similarly,  if  someone  forged  A's  name  to  a  promissory 
note,  and  thereafter  transferred  it. 

These  defenses  are  never  cut  off  even  in  negotiable  paper. 
If  such  paper  comes  into  the  hands  of  an  innocent  holder,  he 
receives  no  better  title  than  the  one  who  transferred  it  to  him, 
and  this  real  defense  is  always  available  to  the  maker  of  the  note. 
It  is  therefore  important  to  notice  who  are  the  previous  endorsers 
upon  the  negotiable  instruments,  for  if  a  note  to  which  there  is  a 
real  defense  passes  into  the  hands  of  an  innocent  holder,  his  only 
recourse  is  to  look  to  the  person  from  whom  he  received  it  for 
recompense.  Ordinary  care  and  prudence,  however,  minimize 
the  danger  of  receiving  defective  instruments.  An  instrument 
cannot  often  be  subject  to  a  real  defense  unless  someone  who  has 
dealt  with  it  is  dishonest. 

Collection  of  Negotiable  Instruments. 

All  negotiable  instruments  should  be  presented  for  pay- 
ment on  the  date  when  they  are  due.  This  is  a  most  im- 
portant practical  point  to  remember  in  cases  where  there  are 
endorsers  to  the  paper.  In  order  to  hold  such  endorsers 
to  their  liability,  to  which  reference  has  previously  been  made, 
it  is  essential  that  they  should  be  given  prompt  notice  of 
the  failure  of  the  maker  of  the  instrument  to  pay  according  to 
his  agreement.  It  will  be  remembered  that  the  statement  was 
made  that  ordinary  endorsers  of  negotiable  papers  became  sure- 
ties for  the  collections  when  due.  It  is  only  reasonable,  therefore, 
to  insist  that  such  instrument  shall  be  presented  promptly  upon 
the  proper  date.     It  is  conceivable  that  the  circumstances  of  the 


maker  of  the  promissory  note  might  change  in  the  course  of  two 
or  three  days,  so  that  if  the  note  were  presented  on  the  due  date 
it  would  be  met,  whereas,  if  there  were  a  delay  of  three  or  four 
days  the  maker  would  become  insolvent.  The  endorsers  are  not 
compelled  to  assume  this  risk,  and  are  entitled  to  have  the  holder 
of  a  negotiable  instrument  show  diligence  in  collecting  it  from 
the  original  maker. 

For  this  reason  the  law  is  extremely  strict  in  requiring  not 
only  presentation  to  the  maker  at  the  proper  time,  but  notice  to 
all  the  endorsers  in  case  the  paper  be  dishonored.  This  presen- 
tation and  the  method  in  which  it  is  accomplished  is  extremely 
technical.  One  of  the  chief  functions  of  notaries  public  is  to 
present  commercial  paper  for  payment.  A  notary  who  is  an 
expert  in  this  work  is  connected  with  every  responsible  banking 
institution,  and  the  simplest  way  for  a  business  man  to  properly 
present  his  commercial  paper  is  to  deposit  it  in  his  bank  for  col- 
lection a  few  days  before  it  becomes  due.  A  considerable  risk  is 
taken  if  one  who  is  not  experienced  attempts  to  comply  with  the 
requirements  of  the  law  in  this  regard. 

If  there  are  no  endorsers  of  a  negotiable  instrument,  the  mat- 
ter of  presentation  is  not  so  important,  because  the  liability  which 
exists  between  the  maker  of  the  note  and  the  payee  is  direct,  and 
so  long  as  only  these  two  are  concerned  the  paper  is  simply  a 
contract,  which  may  be  enforced  at  any  time.  The  maker  of  the 
note,  however,  or  the  drawer  of  a  check  is  entitled  to  have  the 
instrument  which  they  have  signed  promptly  presented,  and  un- 
reasonable delay  in  so  doing  is  always  dangerous.  While  this 
does  not  always  exonerate  the  maker  of  such  an  instrument,  it 
always  gives  rise  to  serious  complications.  Checks  should  always 
be  collected  at  once,  both  as  a  matter  of  business  prudence  and 
commercial  courtesy.  Nothing  is  more  exasperating  than  for  one 
who  has  issued  a  check  to  find  that  it  has  been  retained  uncollected 
for  an  unreasonable  period. 

In  some  States  a  limited  number  of  days  are  allowed  after 
the  maturity  of  a  negotiable  instrument  in  which  to  make  presen- 
tation. These  are  called  days  of  grace.  In  many  jurisdictions, 
however,  days  of  grace  have  been  abolished. 


38 


Business  Engineering. 


In  the  case  of  a  note  payable  on  demand,  it  is  somewhat 
difficult  to  settle  the  question  of  proper  presentment.  The  law 
requires  that  such  an  instrument  shall  be  presented  within  a  rea- 
sonable time.  If,  therefore,  one  were  offered  a  note  payable  on 
demand  which  had  been  outstanding  for  three  or  four  years,  it 
should  be  regarded  with  great  suspicion.  It  is  a  matter  of  actual 
fact,  to  be  determined  by  the  circumstances  in  each  case,  what 
is  a  reasonable  period. 

Limitation  of  Negotiable  Paper. 

Like  every  other  contract,  the  law  fixes  a  time  beyond  which 
the  makers  of  negotiable  paper  shall  not  be  liable.  Thus,  in  the 
State  of  New  York  six  years  after  the  maturity  of  a  promissory 
note,  if  no  payment  has  been  made  as  principal  or  interest,  or  other 
acknowledgment  of  its  continued  existence  given,  the  liability  of 
the  maker  ceases.  In  the  case  of  a  demand  note,  the  instrument 
IS  presumed  to  be  due  on  the  date  when  it  was  made ;  six  years, 
therefore,  from  that  date  the  note  would  become  outlawed. 

Care  should  be  taken,  therefore,  if  one  is  possessed  of  a  nego- 
tiable instrument  which,  for  any  reason,  he  is  unwilling  to  legally 
collect,  to  prevent  the  period  of  limitation  from  running  against 
him.  This  may  be  done  in  several  ways.  Any  payment  of  prin- 
cipal or  interest  will  serve  to  effect  this.  This  result  is  usually 
accomplished  by  the  payment  upon  the  part  of  the  individual  lia- 
ble of  a  nominal  sum  shortly  before  the  period  of  limitation  would 
run  out.  Immediately  upon  such  payment  being  made,  the  instru- 
ment is  renewed  and  the  period  of  limitation  commences  to  run 
again. 


Interest. 

Negotiable  instruments  may  bear  any  rate  of  interest  the 
maker  determines,  so  long  as  it  is  not  so  large  as  to  be  usurious 
by  local  statutes.  If  no  rate  of  interest  is  specified  in  a  negotiable 
instrument,  it  is  presumed  that  interest  will  be  paid  at  the  legal 
rate. 


Lecture  Notes. 


39 


Delivery. 


Mention  has  been  made  in  passing  that  negotiable  instruments 
must  be  delivered.  This  point  should,  however,  be  again  empha- 
sized. Such  an  instrument  is  never  valid  unless  it  is  delivered 
with  the  intention  of  putting  it  into  circulation,  or  allowed  to 
come  into  circulation  under  circumstances  of  gross  negligence. 

Care  of  Negotiable  Instruments. 

A  practical  consideration  for  the  business  man  is  as  to 
the  amount  of  care  which  should  be  exercised  in  holding 
or  transmitting  negotiable  paper.  The  answer  to  this  ques- 
tion depends  entirely  on  the  form  of  the  paper.  So  long 
as  negotiable  paper  is  payable  to  a  definite  individual  it  is 
not  particularly  hazardous  to  send  it  by  mail  or  to  keep  it  in  a 
business  office,  with  proper  precautions.  An  instrument,  however, 
which  is  either  payable  to  bearer,  or  which  has  been  endorsed  in 
blank  is,  it  must  be  remembered,  good  in  the  hands  of  anyone  into 
whose  possession  it  may  come.  If  in  this  form,  therefore,  com- 
mercial paper  must  be  guarded  with  great  care  and  should  only 
be  sent  by  registered  mail  or  express.  It  is  not,  ordinarily,  very 
difficult  for  a  dishonest  person  to  negotiate  a  check  drawn  or 
endorsed  in  the  latter  form,  and  although  financial  institutions 
usually  require  the  identification  of  a  person  who  presents  bearer 
checks,  they  are  under  no  liability  if  they  fall  into  error.  When, 
however,  a  check  is  drawn  to  the  order  of  a  specific  person,  it 
requires  forgery  to  obtain  its  collection  by  an  unauthorized  holder. 

Conclusion. 

The  whole  law  of  negotiable  paper  is  extremely  difficult.  No 
effort  has  been  made  in  the  present  notes  to  attempt  an  exhaustive 
discussion  of  it.  To  have  done  so  would  only  have  resulted  in 
leading  the  reader  into  difficulties  which  are  properly  the  province 
of  those  having  a  special  knowledge  of  the  subject.  It  is  hoped, 
however,  that  the  attempt  in  the  foregoing  pages  to  present  the 
more  salient  features  of  the  law  of  negotiable  instruments  will 
result  in  imparting  sufficient  information  to  enable  the  student  to 


40 


Business  Engineering. 


■t 


If 


obtain  a  general  idea  of  the  problems  which  he  will  meet  and 
considerations  which  should  influence  him  in  deahng  with  nego- 
tiable paper.  It  is  a  matter  of  altogether  too  common  occurrence 
to  see  financial  disaster  overtake  those  who  through  ignorance  and 
a  desire  to  perform  a  friendly  act  have  found  themselves  involved 
m  responsibihty  for  negotiable  instruments  which  they  never 
thought  they  were  assuming.  Almost  as  often  it  is  found  that 
severe  losses  have  been  sustained  through  failure  of  one  who  is  a 
holder  of  negotiable  paper  to  properly  protect  his  interest  therein. 
If  these  notes  shall  serve  to  prevent  either  of  these  disasters  they 
will  not  have  been  written  in  vain. 


SUPPLEMENTARY  NOTE  ON  DEPRECIATION. 

April  15,  1905. 

On  page  117  of  "Lecture  Notes  on  Some  of  the  Business 
Features  of  Engineering  Practice"  appears  the  following: 

"It  is  well  here  to  draw  attention  to  a  mistake  which  is 
sometimes  made  in  estimating  the  average  life  of  a  plant.  Take 
the  case  we  have  already  considered  and  the  calculation  might 
be  as  follows: 


Value  of  Parts 


Years. 

in  Dollars. 

ID 

X 

25,000 

— 

250,000 

15 

X 

50,000 

— 

750,000 

25 

X 

100,000 

— 

2,500,000 

35 

X 

150,000 

= 

5,250,000 

50 

X 

175,000 

8,750,000 

1 7^500,000 
17,500,000  -^  500,000  =  35  years  average  life." 

I  then  show,  step  by  step,  that  $6,790,  the  amount  that  would 
be  sufficient  under  a  4  per  cent,  compound  interest  sinking  fund 
plan  to  redeem  $500,000  in  thirty-five  years,  if  left  undisturbed, 
would  not  be  sufficient  to  provide  for  the  renewals  of  the  several 
parts  of  plant  in  accordance  with  the  assumed  life  table. 

Although  this  part  of  the  subject  was  so  covered  at  consid- 
erable length,  I  now  find  that  it  is  advisable  to  go  farther,  and 
especially  to  answer  two  questions  which  have  been  asked. 

Some  say :  "Why  should  anyone  expect  such  a  calculation  to 
give  the  average  life?" 

Others  say :  "While  it  is  apparent  that  this  process  does  not 
give  the  correct  result,  why  does  it  not  do  so?" 

As  to  the  first  question,  I  can  only  suggest  that  those  who 
have  fallen  into  the  error  have  done  so  by  confusing  this  case  with 
other  cases  not  so  complex. 


i> 


42 


Business  Engineering. 


Lecture  Notes. 


43 


<( 


<( 


For  instance,  if  we  had  25,000  castings  weighing  10  lbs.  each, 

50,000        "  "15 

100,000        "  "        25 

&c., 
we  could  find  the  average  weight  of  the  500,000  pieces  by  the 
process  shown  on  page  117.  Or,  if  we  had  25,000  yds.  of  cloth 
costing  IOC.  a  yard,  50,000  yds.  costing  15c.  a  yard,  100,000  yds. 
costing  25c.  a  yard,  &c.,  we  could  find  the  average  cost  per  yard 
by  the  same  process. 

This  answer  replies  to  the  first  question,  but  makes  the  diffi- 
culty of  those  asking  the  second  question  all  the  greater;  they 
now  say,  "If  this  calculation  is  correct  in  the  case  of  averaging 
weights,  costs,  &c.,  why  is  it  not  correct  for  averaging  the  life  of 
a  plant?" 

The  reply  is  that  the  process  would  be  correct  if  it  covered 
all  the  elements  of  the  proposition  and  was  correctly  applied. 

To  better  follow  the  several  points  involved,  let  us  consider 
this  process  of  averaging  in  the  case  of  a  plan  for  meeting  depre- 
ciation unthout  the  aid  of  interest  accumulation.  In  this  case,  if 
certain  parts  of  the  plant  valued  at  $25,000  are  to  be  renewed  in 
ten  years,  then  each  year  we  must  lay  aside  to  meet  the  deprecia- 
tion of  these  parts  i/ioth  of  $25,000.  And  so  we  would  require 
i/i5th  of  $50,000,  i/25th  of  $100,000,  &c.  The  total  amount 
required  each  year  would  then  be  $17,619,  derived  as  follows: 


i/ioth  of     25,000 

— 

2,500 

i/i5th    '*      50,000 

3-333  1/3 

i/25th    "    100,000 

4,000 

i/35th    "    150,000 

4,285  5/7 

i/50th    "    175,000 

3,500 

500,000  17,619 

But  if  the  correct  average  life  were  35  years,  the  total  amount 
required  each  year  would  then  be  (omitting  interest,  remember) 
500,000  ^  35  =  $14,285.71. 

Now  let  us  see  why  35  years,  and  $14,285.71,  derived  there- 
from, are  not  correct. 

If  we  are  to  find  the  average  life  of  the  plant,  we  must  state 


our  proposition  so  as  to  include  all  the  dollars  involved  in  the  full 
fifty  years  period.  For  instance,  during  the  fifty  years,  we  have 
to  take  care  of  Parts  "A",  $25,000,  five  times,  for  these  parts 
have  to  be  renewed  every  ten  years.  So  for  all  parts  we  shall 
have  to  consider  the  number  of  times  they  will  have  to  be  renewed 
during  the  fifty  years  period. 

Bearing  this  point  in  mind,  the  proposition  stated  on  page 
117  will  then  take  this  form: 

TABLE  ''A." 


Years. 

Value  of  Parts 
in  Dollars. 

Times    Re- 
newed in  50 
Y'rs   Per'd. 

Total  Requirement 

in  60  Years 

Period. 

Years. 

Dollar- 
Years. 

10 
15 
25 
85 
60 

25,000 

50,000 

100,000 

150.000 

175.000 

5 

3% 

2 

m 
1 

125,000          X 
166,666   %  X 
200,000         X 
214,285  %  X 
175,000         X 

10 
15 
25 
35 
50 

=   1,250,000 
—   2,500.000 
=    5,000,000 
=   7,500,000 
=   8,750,000 

500,000 

880,952 

25,000.000 

Having  calculated  the  total  number  of  dollars  required  dur- 
ing the  fifty  years  for  each  class  of  plant,  we  must  then,  in  each 
case,  multiply  by  the  number  of  years  during  which  each  dollar 
(or  the  plant  which  the  dollar  pays  for)  does  duty.  Thus  we 
obtain  the  results  shown  in  the  last  column,  namely  the  "dollar- 
years." 

Dividing  now  the  total  dollar-years  by  the  total  dollars  to  be 
provided  during  the  fifty  years,  we  have  25,000,000  -^  880,952  = 
28.3783  years  as  the  average  life  of  the  plant  represented  origi- 
nally by  $500,000. 

If  our  result  is  correct,  the  amount  required  each  year  to 
cover  depreciation  (omitting  interest)  should  be  the  total  number 
of  dollars  to  be  supplied  during  the  fifty  years  divided  by  50 ;  that 
is,  880,952.38-^50  =  $17,619;  and  it  should  also  be  the  original 
value  of  plant  divided  by  28.3783,  the  average  life  of  plant ;  that 
is,  500,000 -^  28.3783  =  $17,619.  And,  without  considering  the 
question  of  average  life,  we  have  already  found  that  to  replace 


»l 


44 


Business  Engineering. 


Lecture  Notes. 


45 


each  year  i/ioth  of  $25,000,  i/i5th  of  $50,000,  i/25th  of  $100,- 
000,  i/35th  of  $150,000  and  i/50th  of  $175,000  requires  $17,619. 
So  we  find  that  if  the  process  indicated  on  page  117  is  cor- 
rectly stated,  performed  and  applied,  we  get  a  true  average  life 
of  28.3783  years,  requiring  an  annual  payment  from  profits  of 
$17,619  to  provide  for  depreciation  without  interest  accumulations. 

To  guard  against  possible  misconception  as  to  the  so-called 
average  life  of  plant  in  connection  with  the  Sinking  Fund  method 
of  providing  for  depreciation,  we  may  well  consider  in  a  little  more 
detail  the  difference  in  this  respect  between  the  compound  interest 
sinking  fund  process  and  the  direct  method  in  which  is  set  aside 
each  year  the  actual  amount  of  estimated  depreciation. 

In  the  case  we  have  been  considering — referring  to  page  118 
of  the  "Notes" — we  found  that  the  amount  required  to  care  for 
depreciation  of  the  $500,000  by  the  4  per  cent,  compound  interest 
sinking  fund  scheme  was  $10,163.50,  which  is  2.03  per  cent,  of  the 
$500,000 ;  and  this  2.03  is  almost  exactly  the  per  cent,  required  to 
redeem  the  total  original  cost  of  plant  in  27J  years,  provided  the 
sinking  fund  is  not  disturbed  (in  the  "Notes"  I  say  about  28 
years,  but  27I  years  is  more  exact)  ;  and  furthermore  this  per 
cent,  is  sufficient  to  pay  for  the  recurring  renewals  of  the  several 
parts  "A,"  "B,"  "C,"  "D,"  and  "E,"  in  accordance  with  the  Hfe 
table  assumed. 

But  we  have  seen  by  the  calculations  made  in  these  supple- 
mentary notes  that,  by  the  direct  method  of  setting  aside  each 
year  the  actual  amount  of  depreciation,  the  true  average  life  is 
28.3783  years.  In  this  particular  case,  these  two  figures,  27J 
and  28.3783,  are  so  nearly  the  same  that  one  might  be  led  to  sup- 
pose that  they  should  be  in  actual  agreement,  and  that  the  differ- 
ence is  due  to  lack  of  exactness  in  the  compound  interest  calcu- 
lations. A  little  thought  will  show  that  an  agreement  should  not 
here  be  looked  for. 

In  the  direct  method  we  are  arriving  at  a  true  average  life — 
that  is,  the  "average  life"  is  the  number  of  years  elapsed  when  the 
plant  will  have  depreciated  an  amount  equal  to  the  first  cost,  and 
hence,  necessarily,  the  number  of  years  when  the  accumulated 


payments  to  cover  depreciation  will  have  amounted  to  the  first 
cost  of  plant. 

Whereas,  in  the  compound  interest  sinking  fund  scheme,  the 
average  life  (if  we  permit  ourselves  to  use  this  term)  simply 
means  the  number  of  years  required  for  a  certain  annuity  to  accu- 
mulate to  an  amount  equal  to  the  first  cost  of  plant,  provided  no 
withdrawals  are  made;  the  amount  of  this  annuity  with  its  inter- 
est accumulations  being  such,  however,  that  when,  from  time  to 
time,  it  becomes  necessary  to  make  withdrawals  to  cover  deprecia- 
tion in  accordance  with  the  provisions  of  the  scheme,  there  will 
always  be  found  in  the  fund  a  sum  sufficient  to  meet  these  recur- 
ring demands. 

By  the  direct  scheme  (no  interest)  the  accumulation  of  an- 
nual payments  in  the  fund  must  necessarily  be  equal  at  the  end  of 
any  year  to  the  accrued  depreciation.  By  the  compound  interest 
scheme  this  necessarily  would  never  be  the  case  unless  a  time  was 
reached  when  all  the  parts  of  plant  expired  at  the  same  time. 

For  instance,  in  the  life  table  considered  in  the  "Notes,"  there 
is  always  an  overlapping  of  the  life  periods  of  the  several  parts  of 
plant,  and  so  there  will  never  be  in  the  fund  sufficient  to  meet  the 
total  depreciation,  though  there  will  always  be  enough  to  meet  the 
requirements  as  to  each  part  of  the  plant  as  it  has  to  be  renewed. 
This  means  that  when  this  overlapping  of  life  periods  occurs,  as  it 
probably  always  would  in  practice,  the  compound  interest  sinking 
fund  scheme,  strictly  speaking,  is  only  applicable  to  the  case  of  a 
plant  operating  in  perpetuity. 
To  illustrate: 

On  pages  122  and  123  of  the  "Notes"  it  is  shown  that  by  the 
sinking  fund  scheme  we  should  have  in  the  sinking  fund  at  the 
end  of  the  fifty  years,  after  making  all  payments  required  for  the 
renewals  of  parts  "A,"  "B,"  "C,"  "D"  and  "E,"  $54,195.  The 
calculations  are  then  made  to  show  what  should  be  the  accrued 
sinking  fund  liability  on  account  of  the  depreciation  of  parts  "B" 
and  "D,"  the  lives  of  which  overlap  the  fifty  years  included  in  the 
table.  It  is  shown  that  the  five  years'  sinking  fund  liability  on 
parts  "B"  and  fifteen  years'  on  parts  "D"  will  amount  to  $54,312, 
being  practically  in  agreement  with  the  balance  shown  in  the  fund. 


Ill 


46 


Business  Engineering. 


But  this  is  not  the  actual  accrued  liability  for  depreciation, 
which  would  amount  to 

**B" — 15  years  life,  $50,000;     5  years  accrued,      $50,000  X  J^  =  $16,666.66 
"D"-35      "        "     150,000;  15      "  "  150,000X3-7=64,285.71 


$80,952.37 

It  is  thus  seen  that  the  compound  interest  sinking  fund 
scheme,  and  the  simpler  scheme,  which  eliminates  interest  accu- 
mulations, are  essentially  different  in  operation.  In  connection 
with  the  sinking  fund  scheme  the  term  "average  life"  is  mislead- 
ing, whereas,  by  the  direct  scheme  the  true  average  life,  if  desired, 
can  be  determined  by  the  method  shown  in  this  supplementary 
note. 

To  further  illustrate  that  the  true  average  life  will  not  be  the 
same  as  the  time  during  which  a  sinking  fund  scheme,  if  undis- 
turbed, will  accumulate,  the  total  value  of  plant,  we  may  apply  a 
2  per  cent,  and  a  6  per  cent,  sinking  fund  scheme  to  the  life  table 
already  used.  To  make  the  comparison  more  apparent,  I  will 
include  in  the  one  table  these  two  schemes,  the  original  4  per  cent, 
scheme  and  the  direct  scheme   which  entirely  eliminates  interest: 

TABLE   "B." 


Parts  of 
Plant. 


A 
B 
C 
D 
E 


Estimat- 
ed Life 
in  Years. 


10 
15 
25 
35 
50 


Value  of 
Plant  in 
Dollars. 


25.000 

50.000 

100,000 

150.000 

175,000 


Total  Value  of 


3tal  Value  of  1    -««  ^nn 
Plant }  ^^'^^ 


Annual    Payments 
Value 

Years    Required  to 
Value  of  Plant . 


in 


% 


Total  Annual 
Payments 

of    Plant  ) 


Redeem    Total 


AMOUNT  TO  BE  SET  ASIDE  EACH 
YEAR  TO  COVER  DEPRECIATION 


mh  Sink- 
ing Fund. 


1896.75 
2148.00 
1823.00 
1345.50 
602.00 


4o^  Sink- 
ing Fund. 


7815.25 


1.563 


27.05 


2082.25 
2497.00 
2401.00 
2037.00 
1146.25 


2%  Sink- 
ing  Fund. 


10163.50 


2.03 


27.73 


2283.25 
2891.50 
3122.00 
3000.00 
2068.50 


13365.25 


2.673 


28.2 


0%  No 
Interest. 


2500.00 
3333.33 
4000.00 
4285.71 
3500.00 


17619.04 


3.524 


28.378 


Lecture  Notes. 


47 


It  is  thus  seen  that  as  the  interest  rate  of  the  sinking  fund 
mcreases  not  only  will  the  annual  depreciation  payment  be  reduced 
in  amount,  but,  if  we  stipulate  that  in  the  meantime  no  withdraw- 
als shall  be  made  as  in  fact  called  for  by  the  life  table,  then  the 
time  required  to  accumulate  the  total  value  of  plant  will  also  be 
reduced. 

This  seeming  contradiction  is  the  result  of  this  stipulation, 
necessarily  introduced  for  this  time  comparison.  For  we  must 
remember  that  the  amounts  actually  withdrawn  to  meet  partial 
depreciations  ("A,"  "B,"  "C,"  "D'^  and  "E"),  in  accord  with  the 
life  table,  will  be  the  same,  no  matter  what  the  sinking  fund  rate 
of  interest ;  and  as  we  assume  that  these  amounts  are  to  be  left  in 
the  fund  and  allowed  to  accumulate,  the  higher  the  rate  of  sinking 
fund  interest  the  greater  will  be  the  tendency  of  these  accumula- 
tions to  reduce  the  time  in  which  the  total  value  of  plant  will  be 
produced. 

It  is  true  that  there  is  another  factor  involved  in  this  com- 
parison of  so  called  average  lives,  though  no  reference  to  it  is 
apparently  called   for  by  the  comparative  figures   above  given. 

Where  the  factor  just  explained  tends  to  shorten  the  so-called 
average  life,  this  second  factor  here  tends  in  a  minor  degree  to 
lengthen  it. 

The  higher  the  sinking  fund  rate  of  interest,  the  smaller  will 
be  the  sinking  fund  liability  for  each  part  between  the  several 
withdrawal  dates ;  therefore,  the  slower  the  accumulation  and  a 
consequent  tendency  between  withdrawal  dates  to  lengthen  the 
so-called  average  life.  While  this  tendency  ceases  for  each  part 
at  its  withdrawal  date,  the  tendency  is  always  in  force  with  some 
of  the  parts,  and  therefore  always  affects  the  scheme  as  a  whole. 

I  may  avail  myself  of  this  opportunity  to  answer  another 
question  which  seems  to  have  puzzled  a  number  of  the  class: 
"Why  complicate  the  problem  of  depreciation  with  questions  of 
compound  interest ;  why  not  each  year  take  out  of  profits  for  plant 
which  will  have  to  be  renewed  in  ten  years,  i/ioth  of  its  cost,  for 
plant  which  will  have  to  be  renewed  in  fifteen  years,  i/i5th  of  its 
cost,  &c.,  and  then  let  the  interest  on  the  depreciation  fund  be 
absorbed  year  by  year  into  the  profits  ?" 


48 


Business  Engineering. 


Lecture  Notes. 


h 


This  is  exactly  the  case  I  have  covered  in  the  sixth  para- 
graph, page  129,  beginning: 

"The  simpler  and  more  usual  arrangement." 

I  also  refer  to  this  plan  on  pages  138  and  139. 

The  objection  is  the  larger  amount  required  in  the  first  in 
stance  to  cover  the  annual  depreciation  charges. 

We  have  seen  that  by  the  more  direct  method  it  would  re- 
quire $17,619  a  year  taken  out  of  profits,  whereas,  by  the  4  per 
cent,  sinking  fund  scheme  it  would  require  only  $10,163.50;  that 
is,  3.524  per  cent,  of  the  cost  of  plant  instead  of  2.03  per  cent,  of 
cost. 

This  diflFerence  might  prohibit  the  adoption  of  the  simpler 
plan,  especially  in  the  early  days  of  a  new  venture. 

I  am  chiefly  concerned  to  convince  you  that  depreciation 
should  be  provided  for  out  of  profits,  and  I  have  therefore  shown 
the  necessity  of  accurately  estimating  the  depreciation  and  the 
manner  in  which  the  means  may  be  provided  for  meeting  this 
item  of  loss  with  the  least  burden  to  the  business. 

Let  me  also  emphasize  the  point  that  if  a  certain  portion  of 
the  profits  are,  year  by  year,  invested  in  plant  extensions  to  cover 
depreciation,  we  must  be  careful  to  keep  our  accounts  so  that 
there  will  be  no  excuse  offered  for  issuing  additional  bonds  or 
capital  stock  against  these  additions  to  plant,  for  by  this  method 
we  have  simply  made  good  the  depreciation  of  certain  parts  of 
plant  by  adding  other  parts. 

On  page  138  of  the  "Notes"  I  have  shown  a  correct  method 
of  caring  for  this  case. 

Suppose,  for  instance,  we  have  Plant  Account  standing  with 
a  debit  balance  of  $500,000.  Say  at  the  end  of  the  year  we  debit 
Loss  and  Gain  Account  $10,000  for  the  year's  depreciation,  and 
we  credit  this  amount  to  Plant  account.  Then  Plant  Account's 
balance  is  reduced  to  $490,000,  which  correctly  represents  the 
reduced  value  of  plant.  Now  suppose  that  it  so  happens  that  we 
invest  $10,000  (an  amount  exactly  equal  to  the  year's  deprecia- 
tion) in  legitimate  additions  to  plant;  this  amount  is  then 
credited  to  Cash  Account,  debited  to  Plant  Account,  and  the  debit 
balance  of  the  latter  is  so  increased  again  to  $500,000.    Then  the 


49 


depreciation  has  been  exactly  covered  by  the  new  plant  added, 
and  this  fact  is  shown  by  the  Ledger,  for  the  balance  to  the  Dr.  of 
Plant  Account  stands  as  before,  $500,000,  and  so  no  warrant  is 
furnished  for  an  additional  issue  of  securities. 

To  make  these  notes  more  convenient  for  reference,  T  add  the 
compound  interest  and  annuity  tables  required  for  the  calculations 
in  these  notes. 


ANNUITY   TABLE. 

Giving  Yearly  Payments  Required  to  Redeem  $100    (per  cent.)  at  End  of  Any  Year ' 

from  1  to  50.  , 

r  —  1 


J 

fer  cent.   V 

'alues  lor  . 

i\  m  nquai 

tion  A  =  ;5 

r«— 1 

Years 

2«% 

30/0 

SH% 

4% 

4«o^ 

5% 

6% 

Years 

1 

100.00 

100.00 

100.00 

100.00 

100.00 

100.00 

100.00 

1 

2 

49.38 

49.26 

49.14 

49.02 

48.90 

48.78 

48.54 

2 

3 

32.51 

33.36 

32.19 

32.03 

31.88 

31.72 

31.41 

3 

4 

24.08 

23.90 

23.73 

23.55 

23.37 

23.20 

22.86 

4 

5 

19.02 

18.84 

18.65 

18.46 

18.28 

18.10 

17.74 

5 

6 

15.65 

15.46 

15.27 

15.08 

14.89 

14.70 

14.34 

6 

7 

13.25 

13.05 

12  85 

12.66 

12.47 

12.28 

11.91 

7 

8 

11.45 

11.25 

11.05 

10.85 

10.66 

10.47 

10.10 

8 

9 

10.05 

9.84 

9.64 

9.45 

9.26 

9.07 

8.70 

9 

10 

8.93 

8.72 

8.52 

8.33 

8.14 

7.95 

7.59 

10 

11 

8.01 

7.81 

7.61 

7.42 

7.23 

7.04 

6.68 

11 

13 

7.25 

7.05 

6.85 

6.66 

6.47 

6.28 

5.93 

12 

13 

6.60 

6.40 

6.21 

6.01 

5.83 

5.65 

5.30 

13 

, 

14 

6.05 

5.85 

5.66 

5.47 

5.28 

5.10 

4.76 

14 

15 

6.58 

5.38 

5.18 

4.994 

4.81 

4.63 

4.30 

15 

16 

5.16 

4.96 

4.77 

4.58 

4.40 

4.23 

3.90 

16 

17 

4.79 

4.60 

4.40 

4.22 

4.04 

3.87 

3.54 

17 

18 

4.47 

4.27 

4.08 

3.90 

3.72 

3.55 

3.24 

18 

; 

19 

4.18 

3.98 

3.79 

3.61 

3.44 

3.27 

2.96 

19 

i 

20 

3.91 

3.72 

3.54 

3.36 

3.19 

3.02 

2.72 

20 

21 

3.68 

3.49 

3.30 

3.13 

2.96 

2.80 

2.50 

21 

22 

3.46 

3.27 

3.09 

2.92 

2.75 

2.60 

2.30 

22 

23 

3.27 

3.08 

2.90 

2.73 

2.57 

2.41 

2.13 

23 

24 

3.09 

2.90 

2.73 

2.56 

2.40 

2.25 

1.97 

24 

25 

2.93 

2.74 

2.57 

2.40 

2.24 

2.10 

1.82 

25     1 

26 

2.78 

2.59 

2.42 

2.26 

2.10 

1.96 

1.69 

26    i| 

27 

2.64 

2.46 

2.29 

2.12 

1.97 

1.83 

1.57 

27 

28 

2.51 

2.33 

2.16 

2.00 

1.85 

1.71 

1.46 

28 

29 

2.39 

2.21 

2.04 

1.89 

1.74 

1.60 

1.36 

29 

30 

2.28 

2.10 

1.94 

1.78 

1.64 

1.51 

1.26 

30    1 

i 

31 

2.17 

2.00 

1.84 

1.69 

1.54 

1.41 

1.18 

31     j 

32 

2.08 

1.90 

1.74 

1.60 

1.46 

1.33 

1.10 

32     1 

33 

1.99 

1.82 

1.66 

1.51 

1.37 

1.25 

1.03 

33 

34 

1.90 

1.73 

1.58 

1.43 

1.30 

1.18 

0.96 

34 

35 

1.82 

1.65 

1.50 

1  36 

1.23 

1.11 

.90 

35 

1 

36 

1.75 

1.58 

1.43 

1.29 

1.16 

1.04 

.84 

36 

37 

1.67 

1  51 

1.36 

1.22 

1.10 

0.98 

.79 

37 

38 

1.61 

1.45 

1.30 

1.16 

1.04 

.93 

.74 

38 

39 

1.54 

1.38 

1.24 

1.11 

0.99 

.88 

.69 

39 

40 

1.48 

1.33 

1.18 

1.05 

.93 

.83 

.65 

40     • 

41 

1.43 

1.27 

1.13 

1.00 

.89 

.78 

.61 

41 

42 

1.37 

1.22 

1.08 

0.95 

.84 

.74 

.57 

42    1 

43 

1.32 

1.17 

1.03 

.91 

.80 

.70 

.53 

43    1 

44 

1.27 

1.12 

0.99 

.87 

.76 

.66 

.50 

44 

45 

1.23 

1.08 

.95 

.83 

.72 

.63 

.47 

45    j 

46 

1.18 

1.04 

.91 

.79 

.68 

.59 

.44 

46    1 

47 

1.14 

1  00 

.87 

.75 

.65 

.56 

.41 

47     . 

48 

1  10 

0.96 

.83 

.72 

.62 

.53 

.39 

48 

49 

1.06 

.92 

.80 

.69 

.59 

.50 

.37 

49     1 

50 

1.03 

.89 

.76 

.66 

.56 

.48 

.34 

50 

f 


DAMAGED    PAGEfSl 


Years 


I' 


26 
27 
28 
29 
30 

31 
32 
33 
34 
35 

36 
37 

38 
39 
40 

41 
42 
43 
44 
45 

46 

47 
48 
49 
50 


K% 


1 

1.0050 

2 

1.0100 

3 

1.0151 

4 

1.0202 

5 

1.0253 

6 

1.0304 

7 

1.0355 

8 

1.0407 

9 

1.0459 

10 

1.0511 

11 

1.0564 

12 

1.0617 

13 

1.0670 

14 

1.0723 

15 

1.0777 

16 

1.0831 

17 

1.0885 

18 

1.0939 

19 

1.0994 

20 

1.1049 

21 

1.1104 

22 

1.1160 

23 

1.1216 

24 

1.1272 

25 

1.1328 

1.1385 
1.1442 
1.1499 
1.1556 
1.1614 

1.1672 
1.1730 
1.1789 

1.1848 
1.1907 

1.1967 
1.2027 
1.2087 
1.2147 
1.2208 

1.2269 
1.2330 
1.2392 
1.2454 
1.2516 

1.2579 
1.2642 
1.2705 
1.2768 
1.2832 


COMPOUND  IN' 

Giving  Value  of  $1  at  End  of  Any  Year  from  1  to  50.     Can  Al 

Values  for  r"  in  Equatl 


1% 


iji% 


1.0100 
1.0201 
1.0303 
1.0406 
1.0510 

1.0615 
1.0721 
1.0829 
1.0937 
1.1046 


,1157 
1268 


1.1381 


,1495 
,1610 


1.1726 
1 . 1843 
1.1961 
1.2081 
1.2202 

1.2324 
1.2447 
1.2572 

1.2697 

1.2824 

1.2953 
1.3082 
1.3213 
1.3345 
1.3478 

1.3613 
1.3749 
1.3887 
1.4026 
1.4166 

1.4308 
1.4451 
1.4595 
1.4741 

1.4889 

1.5038 
1.5188 
1.5340 
1.5493 
1.5648 

1.5805 
1.5963 
1.6122 
1.6283 
1.6446 


2o/o 


1.0150 
1.0302 
1.0457 
1.0614 
1.0773 

1.0934 
1.1098 
1.1265 
1.1434 
1.1605 

1.1779 
1 . 1956 
1.2136 
1.2318 
1.2502 

1.2690 
1.2880 
1.3073 
1.3270 
1.3469 

1.3671 
1.3876 
1.4084 
1.4295 
1.4509 

1.4727 
1.4948 
1.5172 
1.5400 
1.5631 

1.5865 
1.6103 
1.6345 
1.6590 
1.6839 

1.7091 
1.7348 
1.7608 

1.7872 
1.8140 

1.8412 
1.8688 
1.8969 
1.9253 
1.9542 

1.9835 
2.0133 
2.0435 
2.0741 
2.1052 


1.0200 
1.0404 
1.0612 
1.0824 
1.1041 

1.1262 
1.1487 


1, 

1 

1 


1717 
1951 
2190 


1.2434 
1.2682 
1.2936 
1.3195 
1.3459 

1.3728 
1.4002 
1.4282 
1.4568 
1.4859 

1.5157 
1.5460 
1.5769 
1.6084 
1.6406 

1.6734 
1.7069 
1.7410 

1.7758 
1.8114 

1.8476 
1.8845 
1.9222 
1.9607 
1.9999 

2.0399 
2.0807 
2.1223 
2.1647 
2.2080 

2.2522 
2.2972 
2.3432 
2.3901 
2.4379 

2.4866 
2.5363 
2  5871 
2.6388 
2.6916 


2%% 


1.0250 
1.0506 
1.0769 
1.1038 
1.1314 

1.1597 
1.1887 
1.2184 
1.2489 
1.2801 

1.3121 
1.3449 
1.3785 
1.4130 
1.4483 

1.4845 
1.5216 
1.5597 
1.5987 
1.6386 

1.6796 
1.7216 
1.7646 

1.8087 
1.8539 

1.9003 
1.9478 
1.9965 
2.0464 
2.0976 

2.1500 
2.2038 
2.2589 
2.3153 
2.3732 

2.4325 
2.4933 
2.5557 
2.6196 
2.6851 

2.7522 
2.8210 
2.8915 
2.9638 
3.0379 

3.1139 
3.1917 
3.2715 
3.3533 
3.4371 


3  0/fl 


"/O 


1.0300 
1.0609 
1.0927 
1.1255 
1.1593 

1.1941 
1.2299 
1.2668 
1.3048 
1.3439 

1.3842 
1.4258 
1.4685 
1.5126 
1.5580 

1.6047 
1.6528 
1.7024 
1.7535 
1.8061 

1.8603 
1.9161 
1.9736 
2.0328 
2.0938 

2.1566 
2.2213 
2.2879 
2.3566 
2.4273 

2.5001 
2.5751 
2.6523 
2.7319 
2.8139 

2.8983 
2.9852 
3.0748 
3.1670 
3.2620 

3.3599 
3.4607 
3.5645 
3.6715 
3.7816 

3.8950 
4.0119 
4.1323 
4.25C2 
4.3839 


3Ji  o/fl 


70 


1, 
1. 
1. 
1. 
1. 


0350 
0712 
1087 
1475 
1877 


1.2293 
1.2723 
1.3168 
1.3629 
1.4106 

1.4600 
1.5111 
1.5640 
1.6187 
1.6753 


1 
1 
1 
1 
1 


7340 
7947 
8575 
9225 
9898 


2.0594 
2.1315 
2  2061 
2.2833 
2.3632 

2.4460 
2.5316 
2.6202 
2.7119 
2.8068 

2.9050 
3.0067 
3.1119 
3.2209 
3.3336 

3.4503 
3.5710 
3.6960 
3.8254 
3.9593 

4  0978 
4.2413 
4.3897 
4.5433 
4.7024 

4.8669 
5.0373 
5.2136 
5.3961 
5.5849 


^EST 

TABLE. 

Je  Employed  as  Table  of  Powers  of  1.005, 

1.01,  1.015, 

1.02,  Etc. 

- 

• 

A-S 

r—  1 

rn_i 

4% 

4J^% 

5% 

h%% 

6  0/0 

W2  % 

7% 

Years 

.0400 

1.0450 

1.0500 

1.0550 

1.0600 

1.0650 

1.0700 

1 

.0816 

1.0920 

1.1025 

1.1130 

1.1236 

1.1342 

1.1449 

2 

J249 

1.1412 

1,1576 

1.1742 

1.1910 

1.2079 

1.2250 

3 

ML699 

1.1925 

1.2155 

1.2388 

1.2625 

1.2865 

1.3108 

4 

■l67 

1.2462 

1.2763 

1.3070 

1.3382 

1.3701 

1.4026 

5 

^2653 

1.3023 

1.3401 

1.3788 

1.4185 

1.4591 

1.5007 

6 

.3159 

1.3609 

1.4071 

1.4547 

1.5036 

1.5540 

1.6058 

7 

.3686 

1.4221 

1.4775 

1.5347 

1.5938 

1.6550 

1.7182 

8 

.4233 

1.4861 

1.5513 

1.6191 

1.6895 

1.7626 

1.8385 

9 

.4802 

1.5530 

1.6289 

1.7081 

1.7908 

1.8771 

1.9672 

10 

.5395 

1.6229 

1.7103 

1.8021 

1.8983 

1.9992 

2.1049 

11 

.6010 

1.6959 

1.7959 

1.9012 

2.0122 

2.1291 

2.2522 

12 

.6651 

1.7722 

1.8856 

2.0058 

2.1329 

2.2675 

2.4098 

13 

.7317 

1.8519 

1.9799 

2.1161 

2.2609 

2.4149 

2.5785 

14 

8009 

1.9353 

2.0789 

2.2325 

2.3966 

2.5718 

2.7590 

15 

.8730 

2.0224 

2.1829 

2.3553 

2.5404 

2.7390 

2.9522 

16 

^479 

2.1134 

2.2920 

2.4848 

2.6928 

2.9170 

3.1588 

17 

^|258 

2.2085 

2.4066 

2.6215 

2.8543 

3.1067 

3.3799 

18 

■068 

2.3079 

2.5270 

2.7656 

3.0256 

3.3086 

3.6165 

19 

■911 

2.4117 

2.6533 

2.9178 

3.2071 

3.5236 

3.8697 

20 

R788 

2.5202 

2.7860 

3.0782 

3.3996 

3.7527 

4.1406 

21 

K699 

2.6337 

2.9253 

3.2475 

3.6035 

3.9966 

4.4304 

22 

P4647 

2.7522 

3.0715 

3.4262 

3.8197 

4.2564 

4.7405 

23 

■.5633 

2.8760 

3.2251 

3.6146 

4.0489 

4.5331 

5.0724 

24 

|.6658 

3.0054 

3.3864 

3.8134 

4.2919 

4.8277 

5.4274 

25 

i.7725 

3.1407 

3.5557 

4.0231 

4.5494 

5.1415 

5.8074 

26 

a. 8834 

3.2820 

3.7335 

4.2444 

4.8223 

5.4757 

6.2139 

27 

2.9987 

3.4297 

3.9201 

4.4778 

5.1117 

5.8316 

6.6488 

28 

3.1187 

3.5840 

4.1161 

4.7241 

5.4184 

6.2107 

7.1143 

29 

3.2434 

3.7453 

4.3219 

4.9840 

5.7435 

6.6144 

7.6123 

30 

3.3731 

3.9139 

4.5380 

5.2581 

6.0881 

7.0443 

8.1451 

31 

3.5081 

4.0900 

4.7649 

5.5473 

6.4534 

7.5022 

8.7153 

82 

3.6484 

4.2740 

5.0032 

5.8524 

6.8406 

7.9898 

9.3253 

33 

3.7943 

4.4664 

5.2533 

6.1742 

7.2510 

8.5092 

9.9781 

34 

3.9461 

4.6673 

5.5160 

6.5138 

7.6861 

9.0623 

10.6766 

35 

4.1039 

4.8774 

5.7918 

6.8721 

8.1473 

9.6513 

11.4239 

36 

4.2681 

5.0969 

6.0814 

7.2501 

8.6361 

10.2786 

12.2236 

37 

4.4388 

5.3262 

6.3855 

7.6488 

9.1543 

10.9467 

13.0793 

38 

i.6l64 

5.5659 

6.7048 

8.0695 

9.7035 

11.6583 

13.9948 

39 

k8010 

5.8164 

7.0400 

8.5133 

10.2857 

12.4161 

14.9745 

40 

L993I 

6.0781 

7.3920 

8.9815 

10.9029 

13.2231 

16.0227 

41 

p. 1928 

6.3516 

7.7616 

9.4755 

11.5570 

14.0826 

17.1443 

42 

5.4005 

6.6374 

8.1497 

9.9967 

12.2505 

14.9980 

18.3444 

43 

5.6165 

6.9361 

8.5572 

10.5465 

12.9855 

15.9729 

19.6285 

44 

5.8412 

7.2482 

8.9850 

11.1266 

13.7646 

17.0111 

21.0025 

45 

6.0748 

7.5744 

9.4343 

11.7385 

14.5905 

18.1168 

22.4726 

46 

6.3178 

7.9153 

9.9060 

12.3841 

15.4659 

19.2944 

24.0457 

47 

6  5705 

8.2715 

10.4013 

13.0653 

16.3939 

20.5485 

25  7289 

48 

6.8333 

8.6437 

10.9213 

13.7838 

17.3775 

21.8842 

27.5299 

49 

7.1067 

9.0326 

11.4674 

14.5420 

18.4202 

23.3067 

29.4570 

50 

,1 


[•  J% 


m. 


Humphreys  *'^^  '  "*'*^-\ 

Lecture  notes  on  engineering 
practice 


NEH 

WAY  241994 


COLUMBIA  UNIVERSITY  LIBRARIES 


0041416953 


K, 


'%\ 


>.'i*  .^^v 


ii«a 


END  OF 
TITLE 


